Determination 1323038: IRS revokes a veterans organization’s section 501(c)(4) exemption

View official IRS release (PDF)

Plain-English summary

The IRS revoked a central organization’s section 501(c)(4) exemption and its related group exemption. The organization provided administrative services to subordinate organizations that operated bars and other commercial activities, and the records did not establish the required membership or nonmember-use controls. The IRS concluded that the organization was not primarily engaged in social-welfare activities and that its subordinates did not satisfy the requirements for sections 501(c)(19) or 501(c)(7). The organization was required to file Form 1120 as a taxable entity.

Ruling snapshot

• Question: Did the organization and its subordinate organizations continue to qualify for tax exemption?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(4), 501(c)(7), 501(c)(19), 508, 509, 511, 6001, 6033, and 7428; Rev. Proc. 71-17

Full text (IRS public release)

dim ..--S—S-—~S—t—<CS:S:CS DEPARTMENT OF THEE TREASURY
INTERNAL REVENUE SERVICE

Mandatory Review, MC 4920 DAL
1100.Commerce Street
Dallas, TX 75242

” Release Number: 201323038 501-04.00
: Release Date: 6/7/2013
Date: February 20, 2013
LEGEND . - Date: 1/19/2011
ORG - Organization name
XX - Date Address - address Employer Identification Number:
ORG - Person to Contact/ID Number:
ADDRESS 7 oe
_-Contact Numbers: .
Voice:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

In a determination letter dated November 27, 20XX you were held to be exempt from
Federal income tax under section 501(c)(4) of the Internal Revenue Code (“IRC”). In a
subsequent determination letter, dated July 19, 20XX you received a favorable ruling as —
an organization having met the criterion for continued exemption under IRC § 501(c¢)(4)
and a favorable ruling as a Central organization, recognizing your subordinate
organizations are also exempt under IRC § 501(c)(4). The organization was assigned

Group Exemption Number ####.

Based on recent information received, we have determined 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 with 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 November
10, 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. .

Revenue Procedures 80-25 and 80-27 hold that when a Central organization no longer
exists or qualifies for exemption under IRC 501(c), the group exemption letter is revoked.
Accordingly, your determination letter dated July 19, 20XX is hereby revoked. The result
of the revocation of the group exemption letter is the non-recognition of the exempt
status of all your subordinate organizations. Each subordinate will be advised that it no
longer qualifies for exemption. Each of your subordinate organizations must file an
individual exemption application or a new group exemption application must be filed
under the procedures of Revenue Procedure 80-27.

As a taxable entity, you are required to file Form[s] 1120, U.S. Corporate Income Tax
Return, 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 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

DEPARTMENT OF THE TREASURY
Internal Revenue Service
4122 Town & Country Commons Drive
Suite 128, TE:GE:EO:7956
TAX EXEMPT ANO Chesterfield, MO 63017

GOVERNMENT ENTITIES
DIVISION

August 27, 2010

Taxpayer Identification Number:

ORG
ADDRESS Form:

Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

we

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. lfa
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 fo
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.

Enclosures:
-Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Sincerely,

Letter 3610 (04-2002)
Catalog Number 34801V

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX
. 12/31/20XX
City, State
LEGEND
ORG - Organization name ORG-1 - org-1 XX — Date EIN - ein
Address - address City - city State - state President - president
Vice President - vice president Secretary - secretary DIR-1 through
DIR-4 -.1% through 4°? DIR EMP-1 - 1° EMP RA-1 - 1° RA Co-1
through CO-21 = 1% through 21%* COMPANIES
ISSUES

1. Whether, under the circumstances described, ORG meets the requirements for
   continued recognition of exemption under section 501(c)(4) of the Internal Revenue
   Code.

2. Whether ORG would qualify as an organization described in section 501(c)(7) of the
   Code.

3. Whether ORG would qualify as an organization described in section 501(c)(19) of
   the Code.

FACTS

Background Information

ORG is a social welfare organization whose purpose, according to its Articles of
Incorporation dated June 1, 19XX, is to unite fraternally the wives of veterans with their
husbands belonging to CO-1; to lessen the effects of the Vietnam veteran and their
family and all other legal powers permitted General Not for Profit Corporations.

ORG, exempt under section 501(c)(4) of the Internal Revenue Code (the “Code”)
pursuant to a ruling dated November 27, 20XX, also holds a group exemption for
subordinate organizations which, according to the group exemption determination letter
dated July 19, 20XX, are also exempt from federal income tax under section 501(c)(4)
of the Code.

CO-1 (CO-1) is a veterans organization, itself exempt under Section 501(c)(19) of the
Code, that holds a group exemption for veterans organizations also described in I.R.C.
§ 501(c)(19). CO-1’s web page states that its mission is to “unite veterans and their
families by forming social clubs throughout the United States, which interact with other
social veterans clubs.”

CO-1’s website lists several advantages to be included in its group exemption as a
subordinate organization. These advantages include selling liquor, operating on
Sundays, holding bingo games, and obtaining liquor licenses in dry counties. CO-1's
website markets CO-1 and its group exemption to existing bars and restaurants located
in State as a way to avoid restrictive local liquor laws and as a way to operate on a tax-

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

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

12/31/20XX
City, State

exempt basis. CO-1’s website states that CO-1 will assist in a club’s formation and
application for a liquor license. CO-1 refers to its subordinate organizations as “clubs.”

CO-1’s website requires that its clubs have at least 10 veteran members. CO-1 also
requires its subordinate organizations to send it proof of all veterans’ affiliation. One
question that appears on CO-1’s web page is “do | have to be a member's only club?”
The response is “[a]lthough the tax advantages of being a members only club are
greater, we do not require you to limit your bar to members.....Your doors may be kept
open. By incorporating separately, you keep control of your own club. It is your choice
if you wish to keep your doors open or closed. We only ask that you honor members of
other chapters.”

ORG was one such subordinate of CO-1. Accordingly, on February 9, 20XX, the ORG
was contacted for the purpose of scheduling a joint interview with the officers and key
staff of CO-1 and ORG (hereinafter collectively referenced as “taxpayers’).
PRESIDENT and SECRETARY spoke on behalf of the taxpayers during the initial
telephone contact. They provided that ORG continues on as an auxiliary of CO-1,
however to accommodate CO-1’s subordinates that did not meet the 501(c)(19)
membership requirements, the taxpayers consulted the IRS to find out how to change
ORG’s exempt Code section to 501(c)(4), and was told it must change its EIN. Upon
doing so, the newly exempt IRC 501(c)(4) organization itself became a parent
organization effective, as previously indicated, July of 20XX.

The ORG is in the process of converting its subs to IRC 501(c)(7) pursuant to
consultation with the IRS prior to being contacted for the purpose of the IRS
examination. The taxpayers initiated this process in January 20XX. The taxpayers
faxed a copy of the letter it submitted to the IRS with regard to the status change.
(Exhibit, A) Additionally, upon the advice of the IRS, the organization has notified its
subordinates of the change. A copy of the letter to the subs was provided as well.
(Exhibit B) The letter includes pages excerpted from Publication 3386, “Tax Guide-
Veteran's Organizations’, specifically the section on IRC § 501(c)(7) Social Clubs. The
letter, addressed to “whom it may concern”, advises that the excerpt from the
publication explains CO-1s subordinates responsibilities and their affiliation to ORG.
The taxpayer advises in the letter “ORG Headquarters group ruling is a 501(c)(4) with
all the sub chapters classified under 501(c)(7). The letter goes on to advise members
that a minimum of ten members are required and they need not be veterans, however
must have common goals and interest through their social and recreational activities.
The letter does not address increasing the membership beyond the initial ten member
requirement.

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 Exhibit:
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Add 12/31/20XX

ddress 12/31/20XX
City, State

The property located at Address is CO-2 of which PRESIDENT is a partner. ORG and
CO-1 rent their office and meeting space from PRESIDENT’s LLC.

A joint interview was conducted with the Officers and key employees of CO-1 and ORG
March 3 — 5, 20XX. A Memorandum of Interview was prepared with regard to
information obtained during that interview. The inquiries and information obtained
address the relationship between the two organizations, from the facility used to
conduct their operations, to their staff and officers. The memorandum of interview is
Exhibit C.

Documents provided by ORG, including internal and external communications,
organizational documents, meeting minutes, and brochures provided a timeline to track
the organization’s transition from a subordinate of CO-1 to an independent organization
exempt under IRC § 501(c)(4), and finally to a parent of IRC § 501(c)(4) subordinates,
each of which ORG refers to as “Social Clubs”.

Timeline per Documentation:
January 1, 19XX — Articles of Incorporation Filed for CO-1.

January 23,19 — Date of IRS Letter to CO-1 c/o DIR-1, RE: Group Exemption
(GEN# ), EIN. Letter confirms a ruling letter was issued to CO-1 in November
19XX granting the organization an exemption from Federal income tax under the
provisions of Section 501(c)(19) of the Code of 1954.

June 21, 19XX — Date of IRS Letter 1313 to CO-1 c/o PRESIDENT, EIN: EIN,
requesting additional information to show it met all legal requirements for recognition of
Federal exempt status. The letter acknowledged the submission of Form 1024
(Application), however it was apparently devoid of a substantial amount of necessary
information, as the list requesting documents and information is substantial. Page 2 of
the letter advises “Since you are incorporated, a copy of the Amendment to your
Articles of Incorporation reflecting the seal and signature of the appropriate State official
must be submitted within the specified time.”

August 9, 19XX — Certificate of Amendment of a State Nonprofit Corporation issued by
the State Secretary of State amending the Articles of Incorporation to effect a name
change, changing the name of the organization from CO-1 to ORG.

August 23, 19XX — Date of a document providing the names of the officers of the ORG
(Address, City, State), as well as the number of employees (none), owner of the

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. Schedule No. or Exhibit:
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

ets 12/31/20XX
City; State

building (PRESIDENT), that PRESIDENT is an officer, that rent is $, and that
PRESIDENT is the contact person at #, the organization’s EIN (EIN), Corp ID# N, State
Tax Exempt (ID#), Date organization joined CO-1 (6/1/19XX), and Date of incorporation
(June 1, 19XX). (Exhibit D)

December 7, 19XX — Date of IRS letter to CO-1, clo PRESIDENT, EIN: EIN,
acknowledging receipt of application for recognition of exemption from Federal income
tax. Letter acknowledges organization recognized as exempt under IRC § 501(c)(19) in
November 19XX, and the IRS therefore finds no need to consider the application. The
letter confirms the organization is recognized as a subordinate unit of the parent
organization, CO-1, and is covered under a group ruling # . (Exhibit E)

August 24, 20XX — 20XX Annual Registration Report of a Nonprofit filed with State
Secretary of State’s office. Officers named: PRESIDENT, President; Vice President,
\V-President; Secretary, Secretary. Board members are the same as Officers listed with
no additional members listed.

May 17, 20XX — Date of IRS letter to ORG advising that Form 941 for tax period
03/20XxX filed by the organization did not contain a valid EIN, and the IRS had no record
of an EIN having been assigned to the organization. Since an EIN is required by law,
the IRS assigned the organization EIN: . The letter advised the organization to return
the bottom part of the notice if it already has an EIN, writing in the exact name and EIN
shown on the notice it received assigning the EIN.

October 10, 20XX — Date of IRS Letter to ORG, c/o PRESIDENT, thanking the
organization for applying for an EIN. The letter advises that EIN has been assigned to
the organization. (Exhibit F)

November 27, 20XX — Date of IRS Letter 948 advising of favorable determination to
recognize ORG, EIN: EIN, as exempt under § 501(c)(4), effective June 1, 19XX. The
letter is addressed in care of PRESIDENT. (Exhibit G)

December 6, 20XX — Letter to IRS regarding present and future ORG subordinates.
The letter advises of affiliation, control, exemption eligibility, purpose, sources of
receipts, and nature of expenditures of subs. It also serves as transmittal for
constitution of ORG, list of subs, Form 8718, and copy of parent’s 501(c)(4) exemption
letter. The letter was prepared for the signature of PRESIDENT, President. (Exhibit H)

December 6, 20XX — Letter to IRS regarding present CO-1 chapters wishing to transfer
to ORG. The letter provides that all transferring chapters are affiliated with ORG

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 Exhibit:
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG - 12/31/20XX
Address 12/31/20XX

. 12/31/20XX
City, State

Headquarters, subject to its general supervision or control, and are eligible to qualify for
exemption under section 501(c)(4). The transferring chapters listed are:

e CO-1- Address City, State (EIN: EIN)
e CO-3 -—Address City, State (EIN: EIN)
e CO-Address, City, State (EIN: )

The letter was prepared for the signature of PRESIDENT, President. (Exhibit )

March 27, 20XX — Letter to IRS. ORG prepared response to IRS’ request for additional
information for group ruling (Exhibit J). The organization attached a policy statement
from CO-3. The document is signed by DIR-2, and DIR-3.

April 11, 20XX — Date of IRS letter acknowledging organization's request for a group
exemption letter. The letter asks for more information to complete consideration of the
application:

° Advises that a policy statement was submitted for CO-3 but not for two others
(CO-3 and CO-1)

e Advises two of the subs are 501(c)(19) organizations and exempt under another
GEN (CO-3 and CO-4). The organization was asked to show how the structure
and activities of the two have changed that they now qualify for 501(c)(4) status.

e The letter also asks for a detail description of the subs’ activities and the
percentage of time spent on each, how they will be funded, and a copy of their
organizing document. (Exhibit K)

April 24, 20XX — Date of letter prepared in response to IRS’ April 11 letter. (Exhibit L)
The letter advises that all subs .. .

Are affiliated evidenced by a “Request for Inclusion”

Are subject to ORG HQ’s supervision and control

Use the same constitution

Are eligible for 501(c)(4) status

Are individually incorporated

The letter further advises with regard to the sub that only Chapter1071 is to be included
in the group ruling.

That while CO-1 101 is included in the CO-1 Chapter (501(c)(19) organization), its
articles will be amended to change its name to CO-3, and change its purpose to the
following:

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

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

ttn.

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

12/31/20XX
City, State

“To sponsor activities that promote patriotism, supporting active military and their
families, to sponsor and participate in youth activities.” The subs’ purposes, activities,
and funding:

e % meetings of support — gather together fraternally veterans and their families.
Offer support by phone calls and socials for veterans and their families.
Teaching proper flag etiquette, and dances.

e % organizational — paperwork such as 990 report, employee reports, annual
Secretary of State reports, officers meeting. Officers meetings with members to
explain what is required of their club, such as patriotic activities, (discussion on
what activities can be done without funds such as clean up at local cemetery
where veterans are buried, display flags, visiting the local VA hospital),
supporting active military, (such as pen pal letters to active duty military, calling
spouses to see if they need any help, etc., ), sponsor and participate in youth
activities, (such as fundraisers for JROTC, sponsoring sports events: such as
baseball, softball, etc., teaching the youth proper flag etiquette, distributing
quizzes about Presidents and the flag: with the best score and essay receiving
donated prize).

e % fundraising — take donations from the members and the public, Selling Army
surplus supplies, having thrift store booth: selling donated items.

The letter is signed by PRESIDENT, Executive Director.

July 19, 20XX — Date of IRS Letter 2419 to ORG, c/o PRESIDENT, EIN: EIN,
confirming its exemption under IRC § 501(c)(4) and issuing favorable group ruling
determination recognizing the subs as 501(c)(4) organizations. The organization was
assigned Group Exemption Number . (Exhibit M)

June 16, 20XX — Certificate of Amendment issued by State Secretary of State changing
the name of organization from “ORG” to “ORG”. The amendment application is signed
by PRESIDENT, President.

April 3, 20XX - Certificate of Amendment issued by State Secretary of State changing
the name of organization from “ORG” to “ORG-1”. The amendment application is
signed by PRESIDENT, CEO.

August 17, 20XX — Certificate of Amendment issued by State Secretary of State
changing the name of the organization from “ORG-1” back to “ORG”. The amendment
application is signed by PRESIDENT, CEO.

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

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

Name of Taxpayer Year/Period Ended
ORG 42/31/20XX
Address 12/31/20XX

42/34/20XX
City, State

ORG provided two copies of its operating manual “BOOK”. One was updated June 23,
20XX and the other January 3, 20XX. The organization provides a copy of this book to
each of the “social clubs” that become member subordinates.

The June 23, 20XX revision of the Master Book opens with a letter dated May 19, 20XX
advising “ORG-1 are a 501(c)(4) social organization, because their primary activities
promote the social welfare of the community. There are no IRS membership
requirements under the 501(c)(4), however ORG Headquarters does require you have
at least 10 members. Your members do not have to be veterans just citizens who want
to make ‘BETTER COMMUNITIES THROUGH PATRIOTISM’.

To become a member of ORG you must:

e Request Chapter status, form enclosed.

e Incorporate your won chapter, this keeps your club separate from all other clubs
and keeps your club totally under your control. (Articles of Incorporation
included).

e Obtain an EIN (EIN application included.)

Fill out.and sign Request for Chapter Status application.

Fill out Articles of Incorporation, along with a $ check made out to the Secretary of
State.

Sign EIN application and return all to ORG Hq.

Include a check or money order made out to ORG for $ for chapter membership and $
for each member.”

The letter contains a signature line for Secretary, Administrative Executive.

The May 19, 20XX letter was removed from January 3, 20XX revision of the Master
Book. This revision contains a letter dated January 2, 20XX. It is addressed to “ORG-1
member”. The letter is excerpted as follows:

“Welcome aboard CO-1. | am sending this information package to help you get started
as a club and for the information the IRS insist we have on you. Remember | am here
for you, if you have any questions or problems. | am in the office from 10:30 am to 5:00
pm Monday through Friday. Just give me a call and | will be glad to help.

This package should contain:

Tax Bond Application

State Tax Registration Application
Copy of headquarters group ruling
Guidelines on how to hold a meeting

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

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

Name of Taxpayer | Year/Period Ended
ORG 12/341/20XX
Address 12/31/20XX

. 12/31/20XX
City, State

e CO-1 constitution, bylaws, and policies
e Membership applications

If this package does not include the above listed items, give me a call.
The letter contains a signature line for Secretary, Administrative Executive.

The January 3, 20XX version of the Master Book contains the most recent version of
ORG’s Constitution. Aims and Purposes according to Article V of the document named
“Constitution of ORG CO-1” are:

Section |.
Within the spirit of our motto, Better Communities Through Patriotism, the CO-1
corporations shall lend its support to all veterans, their families and communities.

Section U.
Uniting fraternally families of Veterans and their communities in order to work together
to better the lives of all Veterans and their families and communities and to assist with
any difficulties encountered by them, these purposes include but are not limited to the
following:

1. sponsor activities that promote patriotism

2. supporting our active military and their families

3. awareness of and assistance to the veterans and families suffering from stress

disorders and assimilation back to society

4. present and support the interests of CO-1 before the public and the government

5. providing scholarships for students

6. Sponsor and participate in youth activities.

Article VII of the Constitution addresses Membership. It provides as follows:

Section I.
Chapter Membership
A. Any person or group of persons wanting to promote patriotism in their community
may form a CO-1.
B. All members of all chapters shall be governed by ORG.

Section Il.
Membership Requirement
A. Any person wanting to show their support for promoting patriotism in their
community may join.

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

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Add 12/31/20XX
daress 12/31/20XX
City, State
Section tll.
Dues
A. Membership dues must be paid before a member may vote or hold office in any
chapter.

B. Membership dues are to be sent to National Auxiliary within seven days of the
member joining.

Article VIII of the Constitution addresses Officers and their duties. Section II specifically
addresses “Managing Officer’. It provides: “The Managing Officer of the club must be a
member of the club. The Manager of the club has full control and supervision of the
bar and is accountable for all income and all expenses of the bar. The position may or
may not be filled by an Officer of the Board.”

This version of the Master Book contains a note advising “Please read the next few
pages as they will tell you how to keep your records and what taxes you need to pay.
These pages will save you time and money if you have any questions please call me at
headquarters”

The “pages” are from Publication 3386 “Tax Guide - Veterans’ Organizations” and
address issues that relate to Veteran’s Organizations that are social clubs and exempt
under IRC sec 501(c)(7):

Membership

Guests of members at club functions

Providing sickness, death, and/or similar benefits

Tax deductibility of membership dues

The Publication was as well excerpted to include:

e Information on unrelated business income and the unrelated business income
tax.

e General recordkeeping requirements, as the recordkeeping requirements
specifically for member supported section 501(c)(19) organizations have been
lined through. The recordkeeping requirements for organizations exempt under
sections 501(c)(4), 501(c)(7), 501(c)(8), and 501(c)(10) also included in
Publication 3386, is not included in the Master Book.

e Return filing requirements:

o Form(s) 990/990-EZ

o Form 990-T

o Employment Tax Returns
o Form 1120-POL

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 Exhibit:
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

The organization provided meeting minutes for Board meetings held from February
20XX through December 3, 20XX. The meeting minutes detail the organization's
activities during this period, and are excerpted as follows:

February 2, 20XX — Board Meeting. New Business: President requested members
consider Auxiliary taking responsibilities of support center and note anything it may
need to better serve our community. DIR-4 made motion for members to have ideas on
what we can do to promote.

April 6, 20XX — Board Meeting. Motion made for Auxiliary to help with the support
center, Voted yes. Motion made to find a donation center building or shop. This would
be used-for collection of goods or household needs. Voted donations would primarily
be for support center and disaster victims.

June 1, 20XX — Board Meeting. Thomas motioned a vote by members for the support
center to be promoted and to do any necessary actions to promote the center to the
community. Voted to accept motion . Board members will visit possible building that
may serve as place to make available any donations. Idea to run ad and distribute
fliers soliciting items to go to center.

August 5, 20XX — Board Meeting. Organization’s officers spoke with small construction
company about a building at Address. They and the owner of the CO-21 inspected it.
Everything seems in good structural state. Unanimous vote to purchase building for
use of support center and possible used for other veteran needs. Board members
asked, by, President to spread work of donation program.

October 5, 20XX — Board Meeting. Building purchased and Auxiliary will maintain
promotion, collections and any forms necessary to make decisions as to qualifying
hardship needs. Motion to vote on specific space in the building to display donations.
A room was agreed upon. Motion to make fliers and run an ad in local paper for
support center. Request by President to research forms to use for donations and proof
of hardship.

February 1, 20XX — Board Meeting. Board designated room to place donations for
support center. 25 fliers were placed around town. Two-week ad placed. Donations
have begun coming in. Secretary nominated as Secretary of Board. Nomination
carried. Vote unanimous to put Vice President in charge of necessary forms o be
completed by displaced veterans and community hardship victims. “Needed ideas for

som gee

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

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

wwe 12/31/20XX
City, State

ways to promote furniture.” DIR-4 asked about time “we” would be available to open our
doors to those in need.

April 5, 20XX — Board Meeting. Motion made to move support center donations to room
upstairs. Vote approved. Motion and vote that proof of hardship will be fire or disaster
verified, those on disability, food stamps, and welfare verifications. Discussion —
possibility of going for own exemption. President will research and cover at next
meeting.

June 7, 20XX — Board Meeting. Problem obtaining independent exempt status because
organization is a sub of CO-1 HQ. Decided against because IRS said under CO-1
umbrella. Support Center donations going well but “not receiving many requests toward
response”. Any ideas that Board comes up with for getting information out to vets and
community will be activated at next meeting.

July 4, 20XX — Board Meeting. Vice President still researching forms to use. Another
ad placed in paper for specific locations. City no longer allowing continuation of
donation room due to much needed remodeling. Decision pending as to where to move
and time lapse for advertising due to relocation. Decision to be made at next meeting.

October 14, 20XX — Board Meeting. Vote to continue advertising the center and placed
information forms at stores noting what is available and what to bring to receive. Motion
to reapply for group exempt noting new EIN received. Also discussed formation of
other chapters and what will be necessary to do this.

March 7, 20XX — Board Meeting. Board discussing making CO-1 Aux Chapters fall
under National Aux due to having too many requests for non-members. President is
sending request for the change. President said we are getting to many member
requests that were veteran family. They could not meet the stringent guidelines of the
CO-1 Chapters.

May 9, 20XX — Board Meeting. President reported the IRS had sent a letter stating we
cannot receive our exemption because we are under CO-1 HQ umbrella exemption.
She explained in detail and a motion was made to go forward in obtaining its own
exemption.

July 11, 20XX — Board Meeting. At this time we have not received our group exemption
but it looks as if we have finally mailed what IRS wants. President mentioned we need
to work on a manual for the ORG. will start working on this project. But she also
wants to put together a website.

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

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

September 5, 20XX — Board Meeting. We have received our exemption under
501(c)(4) Social Clubs. is still putting together information for the manual and asks
for input as to what may be added to the manual. Building our website.

December 19, 20XX — Board Meeting. Our first chapter was formed in November # of
City.

December 19, 20XX — Our 1° Chapter was formed in Nov. City.

February 6, 20XX — Board Meeting. Last month we received our status name change.
Vice President said our website is coming together and needs ideas for it. Vice
President said we are now a 501(c)(4) and do not have to meet required veteran status
because our primary activity is to promote patriotism in our community. President said
we have received a request at Headquarters to assist the local Army Reserve in
sponsoring a women’s vet support group. We voted to help in making calls to chapters
to see if they are interested.

April 9, 20XX — Board Meeting. A motion was made to assist Headquarters with
women’s Veteran Support meetings. All voted in favor to make calls and transport vets
to meeting if needed. Vice President mentioned the officers’ manuals are almost ready
and we are getting more requests for new Chapter information. We also discussed that
all of us need to get information together for our chapters to be made aware of tax filing
procedures.

August 6, 20XX — Board Meeting. Manuals are almost ready. We have added 3 new
Chapters and we are updating our website. Motion was made to send newsletters out
to inform clubs of what we need to keep our 501(c)(4) status. Voted yes and Vice
President will work on this.

October 22, 20XX — Board Meeting. Vice President is handing out officers’ manuals
and collecting any information needed to assist in chapters filing annual reports to the
IRS. Our quarterly 941 is filed with no employees. President motioned to call all
chapters to decide the best date for our meeting with chapters.

December 3, 20XX — Board Meeting. A date for Chapter meetings have not been set at
this time. A vote was taken to whether we want to continue with our website or not due
to expenses. We voted to keep it for now.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -12-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

A follow-up conference was conducted with the taxpayers on March 10, 20XX.
Secretary, who stated she is primary contact for ORG was interviewed. She provided
that ORG was established as an auxiliary to CO-1 for the purpose of accommodating
CO-1's “Auxiliary Members” which taxpayers define as spouses of veterans or persons
related to veterans within two degrees of consanguinity like Publication 3386 describes,
however not necessarily being related to CO-1’s veteran members. The change dealt
with the “members”. CO-1 has a combination of Veteran and Auxiliary members (by its
definition of auxiliary). However, CO-1 was getting more and more requests from
“chapters” that did not have the membership to meet the membership requirements of a
501(c)(19) Veterans Organization, and as such were requesting membership as an
Auxiliary. CO-1 was starting to have too many Auxiliaries, so rather than turning the
soliciting entities that did not meet the membership requirements away, CO-1 decided
to change the status of its National Auxiliary to what it calls a “501(c)(4) Social Club”
that does not require members. Since all of the subs of both the HQ and Auxiliary are
bars open to the general public, the parents saw this as an ideal accommodation.

The Board of Directors of CO-1 consists of PRESIDENT, Secretary, and DIR-4
(PRESIDENT’s daughter). These individuals make up the current Board of Directors
and weie the Board of Directors in 20XX. Noting the 20XX return listed Vice President
as Vice-President, PRESIDENT advised Volunteer is a “volunteer” over at CO-1.

PRESIDENT confirmed she is the organization’s President. She is also a salaried
employee advising she only receives a salary when CO-1 is able to pay her one. CO-1
has not paid a salary or any administrative expenses because the Board has not
decided how to allocate expenses between the two entities. Secretary is the primary
contact person for CO-1. She handles most administrative matters involving the subs
such as signing on new chapters, maintaining the organization's web page, answering
questions, preparing and mailing newsletters, and new member packets, assuring all
subs maintain good standing with the Secretary of State, mailing membership cards,
keeping files on the subs including the annual reports, and training office personnel.
Recently, Secretary completed an IRS sponsored on-line training course for completion
of the new Form 990. Her duties have been extended to preparing the returns for CO-1
and ORG subsidiaries. Secretary was formerly employed by the organization(s),
however recently she became a volunteer, coming in to help out when needed (recently
for the primary purpose of this exam).

Secretary advised she will be moving to City, State in April 20XX to live with her sister
and help her start a 501(c)(3) charity.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -13-

Form 386 A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit:
Explanation of Items

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

President is the person in charge. Secretary came to work for President at one of her
bars before she came to do the administrative duties previously described for CO-1.
Currently Secretary is training her replacement who will earn $/hour full-time with her
duties to be split between the 501(c)(19) and 501(c)(4) organizations.

The other employee EMP-1 also makes $$/hour for full-time clerical work. The office is
officially open 7 days from 11:00 a.m. until 5:00 p.m.

PRESIDENT normally earns $/week. The organizations have been discussing having
her earn $/hour if the organizations can afford it.

The office “staff” is under the general control and direction of PRESIDENT.

With regard to the “Ten Member Rule”, Secretary provided that the requirement is that
the subordinate must have 10 members to join the group ruling. The organizations are
advised verbally by Secretary that they should increase their veteran membership. This
was wien they were a 501(c)(19). As a 501(c)(4), the law does not require them to
have membership. The “10 member” requirement is that of CO-1. The rule exists
because it did with the 501(c)(19) entity.

ORG was prompted to request a change of the status of its subordinates from 501(c)(4)
to 501(c )(7) to accommodate the “social” activities of the subs. Since all subs are bars,
changing them to 501(c)(7) organizations would accommodate the social activity that is

abar. Note: the organization did not use the term bar, rather the term “club” was used

when referencing the subordinates.

Secretary described the benefit of being a part of an exempt organization that supports
veterans. She stated that chapters get to be involved in community betterment. She is
not sure the word “exempt” even comes up any more. It is all about Patriotism, teaching
what that is. Participating in activities of a patriotic nature and assisting veterans and
their fainilies. She said at least that is what the subs should be doing. However, she
admitted there are no controls in place to assure that they are.

When asked how ORG sells membership to prospective subordinates, she provided
that by now opportunity for membership in the CO-1 organizations is well known
throughout the state. The opportunity has spread through word of mouth. New “clubs”
contact CO-1 for additional information. Those who are not made aware by word of
mouth access the organization’s web page at website. The Alcohol Division has also
made reference to CO-1 as well as AMVETS and Vikings memberships as a means for
small “clubs” in remote/rural areas to secure a license. Some of the “clubs” were for-

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -14-

one

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

. 12/31/20XX
City, State

profit businesses before becoming exempt, some are newly started. The exemption is
extended to the “club”, not the bar. Therefore ownership is not relevant, as, according
to Secretary, the bars are owned by the clubs and not an individual.

The only advantage ORG gets from new members is the annual dues from each of its
clubs. .

When ORG or CO-1 is contacted by a “club” or someone wishing to start a chapter,
they decide which category of exemption the club will fit determined by the club's
membership and operations. Once it is determined whether the club will be included as
a sub of the 501(c)(4) as opposed to a sub of the 501(c)(19) organization, Secretary,
who is the primary contact for the “social clubs” (ORG) and its subs sends out an
information packet. The chapter is then asked to schedule a face to face meeting at
CO-1 and CO-1’s office in (a telephone conference is allowed, but not
recommended by the Parent organizations) to go over the packet contents and make
sure all documents are complete and correct. Once the dues and membership (for at
least ten members) is paid, blank membership cards are mailed to the chapter.

Membership dues are $ annually. Additionally, the subs are required to remit $ for
each new member ($ for each returning member). Clubs may charge as much as $ for
membership, however the organization only requires the $ new and $ returning member
fee. The clubs may keep the rest.

Referencing the subordinate list provided by ORG on March 3, 20XX, (the taxpayer had
15 active subordinates (two on the list are marked “closed”). The 15 are:
e CO-5

CO-6

CO-7

CO-8
.LO-9

CO-10

CO-11

CO-12

CO-13

CO-14

CO-15

CO-16

CO-17

CO-18

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -15-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

e CO-19

ORG maintains administrative files for each of its subordinate chapters. The
administrative files were reviewed for all of the active chapters. They all contained the
same type of documentation:

Certificates of Incorporation issued by the State of State

Request for Chapter Status forms

Copies of cancelled checks and/or receipts for the Chapter dues

Copies of cancelled checks and/or receipts for payments to the Secretary of
State

Copies of cancelled checks and/or receipts for individual membership dues
Policy Statements .
Member lists

Applications for Employer Identification Numbers

Copies of letters from the IRS (all addressed to the Chapters at ORG’s street
address in City, State)

e Copies of the membership certificates issued by ORG

e State Retail Sales Licenses stamped “Liquor Control Copy”

All of the files contained the above information. Some of the files contained
additional information warranting further noting.

CO-6
In addition to the information bulleted above, the administrative file for this
organization contains:

« A photocopy of the State driver’s license of RA-1. According to the

_information in the file, RA-1 is the entity’s President.

e Apicture of the front of a building. The window of the building has what
appear to be five stickers on it. Each sticker contains a word which as placed
spell out “CO-6”.

e A form entitled “20XX Activity Report Form for CO-1 of ”. “CO-6” is
handwritten in the blank. The form is marked received October 27, 20XX by
Secretary. The form advises that in order to maintain 501(c)(4) status and
track the amount of gross income and prevent overpayment of taxes, the
entities should keep records to show (the following is taken verbatim from the
form):

o Sources of gross income (record should show if it was received from
member or non member. An easy way to do this is to put members
sales on a different key on the register)

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -16-

eee

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

; 12/31/20XX
City, State

o Deductions and expenses related to each activity

o Keep copies of these records for your corporation, National
Headquarters, and the IRS

o All clubs are to meet at least four times a year. When does your club
hold its meetings? (The form goes on to request a copy of the meeting
minutes.)

° The 20XX Activity Report goes on to address the activities of the entity that
promote patriotism. The information is provides as a question, then answer
as follows:

o What did your chapter do to sponsor activities that promote patriotism?
Answer: Heard of a Vets family member was sick, and held a benefit
for him.

o How does your chapter promote awareness of and assist veterans &
their families suffering from stress disorders? Answer: We let Vets
know we are here to listen and relax with our sound system on Friday
and Saturday night.

o What does your chapter do to assist the unemployed or homeless
veterans and their families? Answer: The Vets family member that is
sick, is also homeless. Donated $.

o Inwhat way does your chapter sponsor and participate in youth
activities? Answer: Donated things to be auctioned off for the Happy
Feet Program.

o Has your chapter participated in “Operation Adopt a Unit"? If so, who
and where? What did you do? Answer: We are not for sure what this
means.

e A Form, “Minutes of the Meeting of CO-1 of ” “CO-6” is
handwritten in the blank, as well as the remainder of the form. The minutes
are marked received October 27, 20XX by Secretary. The duration of the
meeting was 6:00 p.m. to 7:00 p.m. on October 1, 20XX:

o Old Business: “Never held a meeting until now. Everyone agrees on
almost everything.”

o New Business: “RA-1 wanted to resign. So we placed new officers
and disgusted our next fun raiser which everyone is supposed to be
making suggestions.”

o Discussion: “Some suggestions for a fund raiser were to have a bake
sale or another auction and donating it to Happy Feet program.”

The administrative file contained no other meeting minutes, or any

documentation that evidenced any other meetings having taken place.

None of the administrative files for any of the other entities contain any

such meeting minutes.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -17-

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

Nanie of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

; 12/31/20XX
City, State

e CO-1 Application for Membership Forms; thirty-three completed forms, with
respect to some of the applicants, accompanied by copies of Department of
Defense Forms DD 214 for some of the member applicants, as well as
military ID cards and copies of cards certifying Veteran status.

CO-5

The entity was incorporated on April 23, 20XX as “CO-5”. According to its Articles, the
corporation was formed for the purpose of entertainment for charitable events. On April
30, 20XX, the Articles were amended to change the name of the entity to CO-5. Its
purpose as amended is to sponsor activities that promote patriotism support active
military-and their families, sponsor and participate in youth activities.

The entity’s administrative file contains a copy of the State Driver’s License of RA-2, the
entity's President.

The file also contains ten completed membership application forms, including one
completed by RA-2. There are three other applications completed by or for persons
also named “RA-2”.

Except as noted, there was nothing in the file that spoke to the activities of the
organizations.

LAW AND ANALYSIS

Tax Exemption - Veterans Organizations

Prior to the enactment of I.R.C. § 501(c)(19) by Public Law 92-418, 1972-2 C.B. 675,
many veterans organizations qualified for exemption from federal income tax under
I.R.C. § 501(c)(4) because most of the traditional activities of these organizations were
recognized by the IRS as primarily promoting social welfare. Staff of Joint Comm. on
Taxation, 109" Cong., Historical Development and Present Law of the Federal Tax
Exemption for Charities and Other Tax-Exempt Organizations, JCX-29-05 NO 8,
(Comm. Print 20XX). The traditional activities of veterans organizations that were social
welfare organizations included promoting patriotism, preserving the memory of those
who died in war, and assisting veterans in need. Id. A veterans organization whose
primary activity consisted of operating social facilities for its members was not able to
qualify for exemption as a § 501(c)(4) social welfare organization, but it could qualify as
a social club under § 501(c)(7). Rev. Rul. 66-150, 1966-1 C.B. 147; S. Rep. No. 1082,
92d Cong., 2d Sess. 2 (1972) reprinted in 1972-2 C.B. 713; H.R. Rep. No. 851, 92d
Cong., 2d Sess. 1 (1972).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -18-

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

Name of Taxpayer Year/Period Ended
ORG , 12/3 1/20XX
Address 12/31/20XX

12/31/20XX
City, State

The Section 501(c)(4) Requirements

Section 501(c)(4) of the Internal Revenue Code grants exemption to "Civic leagues or
organizations not organized for profit but operated exclusively for the promotion of
social welfare.

Section 1.501(c)(4)-1(a)(2)(i) of the Regulations describe the promotion of social
welfare as being 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.

Section 1.501(c)(4)-1(a)(2)(ii) of the Regulations provides the promotion of social
welfare does not include operating a social club for the pleasure, benefit or recreation
of its members, or carrying on a business with the general public in a manner similar to
organizations operated for profit.

Rev. Rul. 68-46, 1968-1 C.B. 260 describes a veteran’s post. After an analysis of the
facts and circumstances, the Service determined that the post’s primary activity was the
conduct of a business rather than a social welfare activity. The organization’s business
activities involved the rental of its commercial office building and operating a public
banquet and meeting hall with a bar and dining facilities. Although the organization
carried on veterans’ programs and other social welfare activities, based on an analysis
of the whole operation it was concluded that the business activities relating to the
operation of the facility exceeded all other activities and social welfare programs were
not its primary activity.

Rev. Rul. 66-150, 1966-1 C.B. 147, considers the exemption of a subsidiary of a
veterans’ organization described in section 501(c)(4) of the code. The subsidiary's
primary purpose is to operate social facilities for members of the veterans’ organization
and their guests including a bar, restaurant and game room. It was held that this
subsidiary does not qualify as an organization described in section 501(c)(4). The
rationale for this ruling is that the subsidiary organization engages in no social welfare
activities and its primary purpose is operating a social club.

Rev. Rul. 61-158, 1961-2 C.B. 115, describes an organization that was created
exclusively for the promotion of social welfare, but whose principal activity was
conducting a lottery on a weekly basis with the general public. Its principal source of

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -19-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

; 12/31/20XX
City, State

income was the gross receipts from the weekly lottery. The major portion of the profits
of the lottery was used for the payment of general expenses of the organization and
only a small portion was used for social welfare purposes. The ruling holds that the
organization is not operated exclusively for the promotion of social welfare purposes
because its primary activity is the conduct of a business for profit. Accordingly, it is not
exempt under section 501(c)(4) of the Code.

The Seetion 501(c)(19) Exemption Requirements

In General

Section 501(c)(19) of the Internal Revenue Code provides for the exemption from
federal income tax of a post or organization of past or present members of the United
States Armed Forces if it is:

(a) Organized in the United States or any of its possessions,

(b) At least 75 percent of its members are past or present members of the Armed
Forces of the United States,

(c) substantially all of its other members are individuals who are cadets or are
spouses, widows, widowers, ancestors or lineal descendants of past or present
members of the Armed Forces of the Unites States or of cadets, and

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

Membership Requirements

Under I.R.C. § 501(c)(19), at least 75 percent of an organization’s members must be
past or present members of the Armed Forces of the United States (‘veterans’).
Section 501(c)(19) does not define the term “Armed Forces of the United States.” The
regulations under I.R.C. § 501(c)(19), likewise, do not define the term. Section
7701(a)(15) of the Code, however, defines “Armed Forces’ to include all regular and
reserve components of the uniformed services which are subject to the jurisdiction of
the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy, or the
Secretary of the Air Force, and the Coast Guard.

In addition, I.R.C. § 501(c)(19)(B) requires that substantially all other members of an
organization be cadets or spouses, widows, widowers, ancestors, or lineal descendants

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -20-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

i 12/31/20XX
City, State

of veterans or cadets. According to the Senate Report accompanying the legislation,
“substantially all” means 90 percent. See S. Rep. No. 1082, 92"! Cong. 2d Sess. 5
(1972), reprinted in 1972-2 C.B. 713, 715. Therefore, of the 25 percent of the members
that do not have to be veterans, 90 percent must be cadets, or spouses, etc.
Consequently, no more than 2.5 percent (10% x 25%) of an I.R.C. § 501(c)(19)
organization's total membership may consist of individuals not mentioned in the

statute.

Neither, IL.R.C. § 501(c)(19), its legislative history, nor the regulations under I.R.C. §
501(c)(19) define what it means to be a member of a veterans organization. However,
whatever the organization requires for one to become a member, the organization must
maintain records tracking who its members are and the proportions in the various
categories of membership permitted under I.R.C. § 501 (c)(19)(B) (member of armed
forces, cadet, relative, etc.) to substantiate that its members are veterans or other
permitted members. See I.R.C. § 6001 and Treas. Reg. §1.6001-1(c).

Operational Test

Section 1.501(c)(19)-1(c) of the regulations provides that an organization exempt under
I.R.C. § 501(c)(19) 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) of the regulations,

• ke ke

' Prior to 2003, ancestors and lineal descendent were not included in the statutory list of persons
permitted to be members. In 2003, Congress amended I.R.C. § 501(c)(19) to include ancestors or lineal
descendents of present or former members of the United States Armed Forces or cadets in the statutory
list of individuals who may be members of an organization. The regulations have not been updated to
reflect this change nor do they reflect the 1982 statutory change eliminating a requirement that veterans
be veterans of war.

2 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 of his delegate may from
time to time proscribe. Every organization exempt from tax under § 501(a) and subject to the unrelated
business income tax, including veterans organizations, must keep such records. Treas. Reg. § 1.6001-
1(a). These books and records are required to be available for inspection by the Service. Treas. Reg. §
1.6001-1(a). In addition, veterans organizations are required to keep books and records to substantiate
information reported on their information return. See I.R.C. § 6033 and Treas. Reg. § 1.6001-1(c). They
are also required to submit additional information to the Service for the purpose of enabling the Service to
inquire further into its exempt status.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -21-

eee

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

Name of Taxpayer Year/Period Ended
ORG 42/31/20XX
Address 42/31/20XX

: 12/31/20XX
City, State

2) To assist disabled and needy war veterans and members of the United States
Armed Forces and their dependents and 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, literary, or educational
purposes,

6) To sponsor or participate in activities of a patriotic nature,

7) To provide insurance benefits for their members or the dependents of their
members or both, or

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

Treas. Reg. § 1.501(c)(19).
Social and Recreational Activities for Members

While Treas. Reg. §1.501(c)(19)-1(c)(8) does not address what it means to “exclusively”
provide social and recreational activities for members it is similar to the exempt purpose
contained in I.R.C. § 501(c)(7), as both provisions permit an exempt organization to
operate social and recreational facilities for its members. In fact, prior to the enactment
of I.R.C. § 501(c)(19), a veterans organization whose primary activity consisted of
operating a bar or restaurant for the benefit of its members would have to qualify as
§501(c)(7) social club to be tax-exempt. See Rev. Rul. 60-324 and Rev. Rul. 69-219.°
These organizations, prior to 1976, were required to operate “exclusively” for the
pleasure and recreation of its members. See I.R.C. § 501(c)(7) (1975). Thus, the

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3 In 1976, Congress amended § 501(c)(7) replacing “exclusively” with “substantially all.” This change was
effected to establish that social clubs will not jeopardize their exempt status if they receive 35% of their
gross receipts from non-membership sources. Only 15% of their gross receipts, however, may be derived
from nonmembers’ use of club facilities or services. Pub. L. No. 92-568, S. Rep. 1318, 94 Cong., 2d
Sess. (1976).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -22-

eee

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

. 12/31/20XX
City, State

rulings and case law under I.R.C. § 501(c)(7) are useful for purposes of determining
whether an I.R.C. § 501(c)(19) veterans organization is providing social and
recreational activities exclusively for its members.

Treas. Reg. § 1.501(c)(7)-1(b) provides that a club that engages in business, such as
making its social and recreational facilities available to the general public is not
organized and operated exclusively for pleasure, recreation, and other nonprofit
purposes, and is not exempt under I.R.C. § 501(a). Solicitation by advertisement or
otherwise for public patronage of its facilities is prima facie evidence that the club is
engaging in business and is not being operated exclusively for pleasure, recreation, or
social purposes.

in West Side Tennis Club v. Commissioner, 111 F.2d 6 (2™ Cir. 1940), cert. denied, 311
U.S. 674 (1940), the Second Circuit upheld the board of tax appeals determination that
a social club was not exempt because a substantial amount of its income was received
from the general public. West Side Tennis Club was organized to provide tennis
facilities for the use and enjoyment of its members. The facilities were only available to
members for most of the year; the club hosted annual national championship tennis
matches, however, that were open to the general public. The club shared in the ticket
proceeds from these matches. The Second Circuit upheld the board of tax appeals
determination that the national championship matches were a substantial and profitable
business which jeopardized the club's exemption. West Side Tennis Club, 111 F.2d at
p. 7.

in Rev. Rul. 60-324, 1960-2 C.B. 173 and Rev. Rul. 69-219, 1969-1 C.B. 153, the
Service held that a § 501(c)(7) social club is not operated exclusively for the pleasure or
recreation of its members if it makes its facilities available to the general public to a
substantial degree. Id. However, this does not mean that all dealings with the general
public are necessarily inconsistent with the club's exempt purposes. For instance, in
Rev. Rul. 60-324, 1960-2 C.B. 173, the Service stated that:

{whhile [the] regulations indicate that a club may lose its exempt status if it
makes its facilities available to the general public, [it] does not mean that
any dealings with outsiders will automatically cause a club to lose its

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4 In 1976, Congress amended § 501(c)(7) replacing “exclusively” with “substantially all.” This change was
effected to establish that social clubs will not jeopardize their exempt status if they receive 35% of their
gross receipts from non-membership sources. Only 15% of their gross receipts, however, may be derived
from nonmembers’ use of club facilities or services. Pub. L. No. 92-568, S. Rep. 1318, 94 Cong., 2d
Sess. (1976).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -23-

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit:

Name of Taxpayer
ORG

Address

City, State

Year/Period Ended
12/31/20XX
12/31/20XX
12/31/20XX

exemption. A club will not lose its exemption merely because it receives
some income from the general public, that is, persons other than
members and their bona fide guests, or because the general public may
occasionally be permitted to participate in its affairs, provided such
participation is incidental to and in furtherance of its general club purposes
and the income there from does not inure to members.

In 1971, the Service issued Revenue Procedure 71-17, 1971-1 C.B. 683, which
contains guidelines for determining the impact of an organization’s nonmember gross
receipts on its exempt status under I.R.C. § 501(c)(7). The revenue procedure provides
that “[a] significant factor reflecting the existence of a nonexempt purpose is the amount
of gross receipts derived from use of a club’s facilities by the general public.” The
revenue procedure went on to provide a safe harbor for organizations serving the

general public:

As an audit standard, [the gross receipts derived from the general public]

alone will not be relied upon by the Service if annual gross receipts from
the general public for [use of the club’s facility] is $2,500 or less or, if more
than $2,500, where gross receipts from the general public for use is five
percent or less of total gross receipts of the organization.

Rev. Proc. 71-17, 1971-1 C.B. 683 at § 3.01.

The term “general public” is defined as persons other than members or their
dependents or guests. Id. at § 2.01. Section 3.03 of Rev. Proc. 71-17 provides four
instances in which nonmembers are assumed to be the guests of the members. The

assumptions include:

Where a group of eight or fewer individuals, at least one of whom is a
member, uses club facilities, it will be assumed for audit purposes that the
nonmembers are the guests of the member, provided payment for such
use is received by the club directly from the member or the member's
employer.

Where 75 percent or more of a group using club facilities are members, it
will likewise be assumed for audit purposes that the nonmembers in the
group are guests of members, provided payment for such use is received
by the club directly from one or more of the members or the member's
employer.

Form 886-A (rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -24-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

Rev. Proc. 71-17, Section 3.03.

In Pittsburgh Press Club v. United States, 615 F.2d 600 (37 Cir. 1980), the Third Circuit
upheld the Commissioner's determination that a social club failed to qualify for
exemption from income tax as a §501(c)(7) organization because it was operated for
business and not for the pleasure and recreation of its members. The Pittsburgh Press
Club was organized for the purpose of providing a professional and social meeting
place for its members. During the years under exam, however, the Pittsburgh Press
Club hosted several functions for nonmember outside groups, although each such
group had been member sponsored. Based on the amount of nonmember revenues
($281,000 of nonmember receipts), as well as the percentage of those revenues (11 to
17 percent of gross receipts), the Third Circuit upheld the revocation stating that the
exemption from Federal income tax for §501(c)(7) organizations “is to be strictly
construed.” Pittsburgh Press Club, 615 F.2d at 606. The Court stated that such strict
construction cannot be reconciled with the fact that a substantial amount of the Club’s
activities and income consisted of nonmember functions and nonmember income.
Therefore, the Court held “revocation of its exemption was proper.” Id.

The Section 501(c)(7) Exemption Requirements

Section-501(a) of the Internal Revenue Code exempts from taxation organizations
described at subsection 501(c)(7) as clubs organized for pleasure, recreation, and other
non-profitable purposes, substantially all of the activities of which are for such pleasure,
recreation, and other non-profitable purposes and no part of the net earnings of which
inures to the benefit of any private shareholder.

Section 1.501(c)(7)-1 of the Income Tax Regulations states in pertinent part, that:

(a) The exemption provided by § 501(c)(7) of the code applies only to clubs which
are organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, but does not apply to any club if any part of its net earnings
inures to the benefit of any private shareholder. In general, this exemption
extends to social and recreation clubs that are supported solely by membership
fees, dues, and assessments. However, a club otherwise entitled to exemption
will not be disqualified because it raises revenue from members through the use
of club facilities or in connection with club activities.

(b) 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 their
products, is not organized and operated exclusively for pleasure, recreation, or
social purposes.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -25-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

; _ 12/31/20XX
City, State

Section 501(c)(7) was amended in 1976 by P.L. 94-568 to provide that section
501(c)(7) organizations could receive some outside income, including investment
income, without losing their exempt status. Prior passage of this law in 1976, section
501(c)(7) of the Code provided exemption for social clubs organized exclusively for
pleasure, recreation, and other non-profitable purposes. P.L. 94-568 substitutes the
word “substantially” for “exclusively”.

Both Senate and House Committee Reports show that this wording change was
intended to make it clear that social clubs may receive outside income, without losing
their exempt status. However, the committee reports also specified clearly defined
limits Gr this outside income, which if exceeded then invoke the application of a facts
and circumstances test. The law allows social clubs to receive up to 35% of their gross
receipts, including investment income, from sources outside their membership without
losing their exempt status. Within this 35%, no more than 15% of gross receipts may
be derived from non-member use of club facilities and/or services. (S. Report No. 94-
1318 (1976), 2d Sess.,1976-1 C.B. 597; H. Report No. 94-1353, to accompany H.
Report 1144 (Public law 94-568, 3-4, 8 (1976)).

United States v. Fort Worth Club, 5 Cir. 345 F. 2d 52, 55 read in part, “We begin with
the general proposition that tax exemptions, except those of charitable organizations,
are to be construed strictly.” The courts further provided that the legislative history
urges a particularly strict construction for the exemption of social clubs. Thus only a
limited number of facts and or circumstances warrant continued exempt status where
the percentage of non-member income exceeds the percentage guidelines.

Pittsburgh Press Club v. U.S., 536 F2d (1976); 579 F.2d 751 (1978); and 615 F2d 600
(1980), that a substantial portion of the club’s total receipts was from non-member use
of a club’s facilities (determined between 11 — 17% of gross income) indicated to the
court that the club was engaged in business with the general public. Other factors
noted by the court to consider in addition to the level of non-member income include:

a) The purposes for which the club’s facilities were made available to non-member
groups,

b) The frequency of use of the club facilities or services by nonmembers; and
c) The amount of net profits derived from non-member income.

The audit standards described in Revenue Procedure 71-17 as discussed above are
applicable as well for this type of member organization.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -26-

eee

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

Name of Taxpayer Year/Period Ended

ORG 42/31/20XX

Address 12/31/20XX
12/31/20XX

City, State

t

Other Applicable Provisions

Record Keeping and Information Retention Requirements:

Section 1.6001-1(a) of the Income Tax 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 on 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(e) of the regulations states 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 as long as the contents thereof may be
material in the administration of any internal revenue law.

Section 6033(a)(1) of the Code provides, except as provided in section 6033(a)(2),
every organization exempt from tax under section 501(a) shall file an annual return,
stating specifically the items of gross income, receipts and disbursements, and such
other information for the purposes of carrying out the internal revenue laws as the
Secretary may by forms or regulations prescribe, and keep such records, render under
oath such statements, make such other returns, and comply with such rules and
regulations as the Secretary may from time to time prescribe.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested
to produce a financial statement and statement of its operations for a certain year.
However, its records were so incomplete that the organization was unable to furnish
such statements. The Service held that the failure or inability to file the required
information return or otherwise to comply with the provisions of section 6033 of the
Code and the regulations which implement it, may result in the termination of the
exempt status of an organization previously held exempt, on the grounds that the
organization has not established that it is observing the conditions required for the
continuation of exempt status.

Group Exemptions — Revenue Procedure 81-27:
Revenue Procedure 81-27 sets forth the procedures under which recognition of
exemption from federal income tax under section 501(c) of the Internal Revenue Code

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -27-

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

Nariie of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

12/31/20XX
City, State

may be obtained on a group basis for subordinate organizations affiliated with and
under the general supervision or control of a central organization.

Paragraph three (3) of the Revenue Procedure defines provides the definitions of group
exemption letter, central organization and subordinate:

01 A group exemption letter is a ruling or determination letter issued to a central
organization recognizing on a group basis the exemption under section 501(c) of
the Code of subordinate organizations on whose behalf the central organization
has applied for recognition of exemption in accordance with this revenue

«procedure.

02 A central organization is an organization that has one or more subordinates
under its general supervision or control.

03 A subordinate is a chapter, local, post, or unit of a central organization. It may or
may not be incorporated, but it must have an organizing document. A central
organization may be a subordinate itself, such as a state organization which has
subordinate units and is itself affiliated with a national organization.

Paragraph four (4) of Revenue Procedure provides the requirements for inclusion ina
group exemption letter:

01 A central organization applying for a group exemption letter must obtain
recognition of its own exempt status.

02 It must also establish that the subordinates to be included in the group
exemption letter are:

1. Affiliated with it;

2. Subject to its general supervision or control;

3. All exempt under the same paragraph of section 501(c) of the Code,
   though not necessarily the paragraph under which the central organization
   is exempt;

4. Not private foundations, if the application for a group exemption letter
   involves section 501(c)(3);

5. Allon the same accounting period as the central organization if they are to
   be included in group returns; and

6. Organizations that have been formed within the 15-month period prior to
   the date of submission of the group exemption application, if they are
   claiming section 501(c)(3) status and are subject to the requirements of
   section 508(a), and wish to be recognized as exempt from their dates of
   creation. A group exemption letter may be issued covering subordinates,
   one or more of which have not been organized within the 15-month period

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -28-

eee

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

Name of Taxpayer Year/Period Ended

ORG 12/31/20XX
Address 12/31/20XX
12/34/20XX

City, State

prior to the date of submission if all subordinates are willing to be
recognized as exempt only from the date of application.

03 .Each subordinate must authorize the central organization to include it in the
application for the group exemption letter. The authorization must be signed by a
duly authorized officer of the subordinate and retained by the central
organization while the group exemption letter is in effect.

Section 6 of the Revenue Procedure provides for the information required annually to
maintain a group exemption letter including the records and information listed at
Section 5.03, subparagraphs 1a through h:

(a) information verifying the existence of the relationships required by section
4.02;

(b) a sample copy of a uniform governing instrument (charter, trust indenture
articles of association, etc.) adopted by the subordinates; or, in the absence
of a uniform governing instrument, copies of representative instruments;

(c) a detailed description of the purposes and activities of the subordinates
including the sources of receipts and the nature of expenditures;

(d) an affirmation that, to the best of the officer's knowledge, the purposes and
activities of the subordinates are as set forth in (b) and (c) above;

(e) a statement that each subordinate to be included in the group exemption
letter has furnished written authorization to the central organization as

., . described in section 4.03;

"(f) a list of subordinates to be included in the group exemption letter to which the
Service has issued an outstanding ruling or determination letter relating to
exemption;

(g) if the application for a group exemption letter involves section 501(c)(3) of the
Code, and is subject to the provisions of section 508(b), an affirmation to the
effect that, to the best of the officer's knowledge and belief, no subordinate to
be included in the group exemption letter is a private foundation as defined in
section 509(a); and

(h) for each subordinate that is a school claiming exemption under section
501(c)(3), the information required by Rev. Proc. 75-50, 1975-2 C.B. 834.
Also, there must be included such other information necessary to establish
that the school is complying with the requirements of Rev. Rul. 71-447, 1971-
2 C.B. 230.

Section 7 of the Revenue Procedure, outlines the circumstances under which the group
exemption letter will cease to have effect, and includes when the Service notifies the
central organization or the affected subordinate that the group exemption letter shall

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -29-

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

Name of Taxpayer Year/Period Ended
ORG . 12/31/20XX
Address 12/31/20XX

. 12/31/20XX
City, State

cease to have effect as to some or all of the group because the conditions set out in .01
or .02 of this section have not been fulfilled:

01 Continued effectiveness of a group exemption letter is based on the following
conditions:

1. continued existence of the central organization;

2. continued qualification of the central organization for exemption under
   "* gection 501(c) of the Code;

3. annual submission by the central organization of the information required
   by section 6; and

4. annual filing by the central organization of an information return if one is
   required of it under section 6033.

02 Continued effectiveness of a group exemption letter as to a particular
subordinate is based on the conditions set out in .01 of this section and the
following conditions:

1. continued conformity by the subordinate to the requirements for group
   exemption set out in SEC. 4.02 and 4.03; and

2. annual filing of an information return for the subordinate if one is required
   of it under section 6033 of the Code.

ORG Financial Information
Form 990

Revenue 20XX 20XX° 20XX
Membership Dues
Gross Sales of Inventory
Less: Cost of Goods Sold
Equals: Net Sales
TOTAL REVENUE

Expense
Benefits Paid to or for Members
Salaries, Compensation, Benefits
Occupancy, Rent, Utilities, Maintenance
Printing, Publications, Postage, Shipping
Truck Upkeep, Bank Fees, Taxes, Office
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5 The taxpayer filed Form 990-N "Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File
Form 990 or 990-EZ, if they choose not to file Form 990 or Form 990-EZ.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -30-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

Equipment, Secretary of State Fees
TOTAL EXPENSE
Excess or Deficit)

Financial Records
Bank Statements

The taxpayer's financial records consists only of Bank Statements Drawn on CO-20,
Address, City, State Checking Account Number and was only made available for the
20XX examination period.

The deposits entered into the account are identified as either “BANKCD”, or “DDA
Regular Deposit”.

A deposit analysis for the checking account provides as follows:

Beginning Bank Balance $
Deposits

Funds Available
Ending Balance
Cost of Goods Sold

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Taxpayer’s Position

The taxpayer's position is outlined in Exhibit N, “Answers and Inconsistency to the
Issues on Form 886” (2 pages containing 24 listed items).

Government's Position
The Government's position is noted in Exhibit O (9 pages) addressing each of ORG’s
24 itemized concerns.

Issue 1--Analysis

Section 501(c)(4) of the Code imposes an operational test on organizations described
in that section. Social welfare organizations are not precluded from engaging in
business activities per se, either as a means of providing direct community benefit or as
a means of financing their social welfare programs. Thus, in Rev. Ruls. 66-221 and 68-
45, the fact that the organizations engaged in some activities characterized as business
with the general public preclude a finding that they were nevertheless described in

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -31-

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

Name of Taxpayer _ Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

12/31/20XX
City, State

section 501(c)(4). An analysis of these organizations as a whole showed that the
business of operating the fire departments and conducting veterans’ activities,
(activities that directly benefit the community as a whole) were the organizations’
“orimary” activities. On the other hand, a business activity conducted as the
organization's primary activity precludes exemption under section 501(c)(4) of the code.
Thus, in Rev. Ruls. 68-46 and 61-158, exemption was precluded by a finding that the
business activities of operating banquet facilities and conducting a public lottery were
the organizations; primary activities. These activities, standing alone, provide no
special benefit to the community independent from the monies raised. They differ little
from the operation of commercial businesses other than the fact that the profits are
earmarked for social welfare purposes.

The Regulations state that the promotion of social welfare does not extend to the
operation of a social club for the benefit of its members. Nor does it include carrying on
a business with the general public in a manner similar to organizations operated for
profit. Therefore, in determining whether an organization is primarily engaged in social
welfare activities, it is important to consider the extent to which it participates in
business and social activities.

ORG was recognized as exempt under section 501(c)(4) of the Code. Subsequently, it
received recognition as a Central organization and assigned group exemption number
5411 maintaining its recognition as an organization described at section 501(c)(4) of the
Code, as well as its subordinates.

The timeline, prepared from documentation provided by the taxpayer, offers that the
taxpayer was originally formed as CO-1, EIN, as a subordinate of CO-1 and exempt
under IRC section 501(c)(19). Its transition to ORG, EIN, a Central Organization
exempt under section 501(c)(4) began when the taxpayer changed its name from CO-1
(incorporated January 1, 19XX) to ORG on August 9, 19XX. The taxpayer was advised
[despite having changed its name] that it is exempt under § 501(c)(19) as a subordinate
of CO-1, under group exemption number (GEN) effective November 19XX.

On May 17, 20XX, the IRS notified the taxpayer that it failed to include its EIN on Form
941 for the 20XX03 tax period, and that there was no record of an EIN being assigned
to the organization. As such the taxpayer was assigned EIN for the purpose of
processing the return only. The taxpayer was advised that if it already had an EIN, that
it should complete a form attached to the letter and return it to the IRS along with the
name the exact name associated with the EIN. In accordance with the instruction, the
taxpayer should have returned EIN and the name CO-1. Under the name ORG, the
taxpayer applied for a new EIN and on October 10, 20XX was assigned EIN. On

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -32-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

. 42/31/20XX
City, State

November 27, 20XX the taxpayer used the new name and EIN to receive a favorable
determination as an IRC § 501(c)(4) organization. The effective date of the exemption
is June 19XX. June 16, 20XX the taxpayer received Articles of Amendment changing
its name to ORG.

The Information the taxpayer provided to the IRS as part of its application for
recognition as a Central Organization listed CO-1 as its first subordinate. After
being advised by the IRS that CO-1 is already exempt as a subordinate of CO-1
and is recognized as exempt under GEN , the taxpayer advised that the name of
the subordinate would be changed to CO-3 Auxiliary, its purpose according to the
taxpayer, “to sponsor activities that promote patriotism, supporting active military and
their families, to sponsor and participate in youth activities.” The facts provide the
subordinate’s activities as being consistent with a veteran's organization exempt under
§ 501(c)(4) of the Code. The IRS advised the taxpayer of the favorable ruling to
recognize the taxpayer's subordinates as IRC § 501(c)(4) organizations.

The résult of the analysis of the information provided by the taxpayer is that its minutes
contain the only specific information available regarding its activities. The board
meeting minutes also chronicle the taxpayer's migration to becoming a Central
Organization after having received an independent ruling as an organization exempt
under IRC § 501(c)(4). The December 19, 20XX meeting minutes contradict the
information the taxpayer provided to the IRS in its application for a group ruling, as the
minutes provide that the organization's first chapter was formed in November, #

City, and was not CO-3 as it indicated in its application.

The taxpayer provided its meeting minutes for the period spanning February 2, 20XX
through December 3, 20XX, which includes the examination period that begins January
1, 20XX and ends December 31, 20XX. Board meetings, which are recorded verbatim
in the “Facts” section of this report, equaled 5 hours in 20XX; 4 hours and 35 minutes in
20XX; and 5.5 hours in 20XX. The taxpayer is open 7 days a week for six hours each
day, thérefore the taxpayer devotes (accommodating the Thanksgiving, Christmas, and
New Year holidays) less than 1% of its time to meetings and planning. The balance of
its time is spent on administrative matters concerning its subordinates as described by
Secretary.

The Code first requires exempt organizations to keep permanent books or accounts or
records as are sufficient to establish the amount of income, deductions, credit and other
matters required to be shown in any return of tax; and secondly to keep, at all times
available for inspection by authorized internal revenue officers or employees, the

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -33-

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

Name of Taxpayer Year/Period Ended
ORG 42/31/20XX
Address 12/31/20XX

: 12/31/20XX
City, State

required books and records, and third to maintain such books and records as long as
the contents may be material to the administration of any internal revenue law.

The taxpayer maintained few books and records to support having carried out any of
the proposed activities recorded in the meeting minutes. From the records and
information available, including the returns filed by the taxpayer for the examination
period, and the information obtained from the interview, the taxpayer's activities
included attending to the administrative matters of its subordinates, tending to its own
administrative matters, and operating an unidentified business enterprise as identified
by the financial records.

The facts provide that tending to the administrative matters of its subordinates is the
taxpayei’s primary activity.

Rationalizing that if the taxpayer spent the primary amount of its time addressing
administrative matters of its exempt subordinates that are engaging in activities that
promote the taxpayer's exempt purpose, the taxpayer itself is furthering such purpose
by this substantial activity.

Revenue Procedure 80-27 addresses the procedures for securing exemption for the
subordinates, as well as documentation to be submitted with regard to the qualification
of these subordinates as exempt within the meaning of § 501(c)(4) of the Code. As
previously indicated, the Code requires that the taxpayer maintain the information as it
is the only means by which to measure the taxpayer's qualification for continued
exempt status.

The Revenue Procedure provides that as a Central Organization, the taxpayer must
establish that the subordinates to be included are: affiliated with it; subject to its
general supervision or control; all exempt under the same paragraph of section 501(c)
of the Code, though not necessarily the paragraph under which the central organization
is exempt; and each subordinate must authorize the Central Organization to include it in

the application for the group exemption.

The taxpayer's purpose, according to its Articles of Incorporation, is to unite fraternally
the wives of veterans with their husbands belonging to CO-1. To lessen the effects of
the Vietnam veteran and their family and all other legal powers permitted general not
for profit organizations.

The taxpayer's Aims and Purpose according to the most recent revision of its
Constitution is “Within the spirit of our motto, Better Communities Through Patriotism,

Form | 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -34-

macccccsmmcmmmsmmmreer

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

Name of Taxpayer Year/Period Ended
ORG 42/31/20XX
Address 12/31/20XX

; 12/31/20XX
City, State

the CO-1 corporations shall lend its support to all veterans, their families and
communities.

Uniting fraternally families of veterans and their communities in order to work together
to better the lives of all veterans and their families and communities and to assist with
any difficulties encountered by them, these purposes include but are not limited to the
following:

1. Sponsor activities that promote patriotism

2. supporting our active military and their families

3 awareness of and assistance to the veterans and families suffering from
stress disorders and assimilation back to society.

4. present and support the interests of CO-1 before the public and the
   government

5. providing scholarships for students

6. sponsor and participate in youth activities

In order to accomplish these purposes the taxpayer provided in its exemption
application that its subordinates would conduct their activities, devoting % of their
time gathering veterans and their families together fraternally and offer support by
making phone calls and socials for veterans and their families; | % preparing returns
and other documents typical of corporate reporting, meetings of officers to discuss
activities typical of a § 501(c)(4) organization; and % fundraising by taking donations
from members and the public, selling Army surplus, having a thrift store booth, and
selling donated items.

As the facts indicate, the taxpayer did not produce any record that any of the activities
of its subordinates are consistent with the activities it implied their subordinates would
conduct. Additionally, the taxpayer did not produce any record that it had the control
and affiliations required for exemption. Each of the organizations did sign a request in
some form to be included in the taxpayer's exemption letter.

Further, the statements offered by the taxpayer during the noted interviews revealed
that the primary activity of its subordinates is the operation of a bar. In fact, the
taxpayer, by its own admission sought and obtained an independent exempt status in
order to accommodate the failure of these bars to meet the strict member requirements
of its previous § 501(c)(19) status, and to accommodate the intense social activities,
that is, operating a bar.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -35-

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

Name of Taxpayer Year/Period Ended
ORG 42/31/20XX
Address 12/31/20XX

. 12/31/20XX
City, State

The taxpayer’s web page which it shares with former parent, CO-1, lists among the
advantages of being included in the taxpayer's group exemption, selling liquor on
Sunday, holding bingo games, obtaining liquor licenses in dry counties. The web page
advises potential subordinates that the taxpayer will assist in the club’s formation, and
application for liquor license.

The taxpayer's statements also provide when asked what it provides in exchange for
the membership dues paid by its subordinates, the administrative services provided its
subordinates, preparing returns, guidance on securing licenses, sales tax exemption,
filing returns, etc. is no different than a bookkeeping, accounting, or tax planning service
operated commercially.

Issue 1--Conclusion:

The law with regard to IRC § 501(c)(4) organizations is clear. The operation of a bar,
whether for qualified “war” veteran members, auxiliary members, and bona fide guests
does not serve to promote social welfare within the meaning of the § 501(c)(4). The
conduct of the business itself, apart from recreation, provides no direct benefit to the
community. As such, the business of operating a bar constitutes carrying on a business
in a manner similar to entities that are operated for profit.

As the taxpayer's primary activity is to provide administrative services to entities, which
by its own admission, and is supported by an analysis of its records, is consistent with a
commercially operated establishment that provides such service; and that service is
provided to establishments which, again by the taxpayer's own admission, and also
supported by the analysis of the books and records, carrying on a business, a bar, ina
manner similar to entities operated for profit, the taxpayer does not meet the
requirements for continued recognition of exemption under section 501(c)(4) of the
Code.

Issue 2--Rationale:

The taxpayer's web page, requires its clubs have at least 10 veteran members. It also
provides that prospective subordinates send it proof of all veterans’ affiliation. In
response to whether the bars have to be “members only clubs’, the taxpayer
acknowledges that the tax advantages of being a members only club are greater
(acknowledging that the exemption under this section is intended for membership
organizations), yet the taxpayer does not require its subordinates to limit its bar to
members. It advises that the bars’ doors may be open to the public if the bar chooses

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -36-

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

Name of Taxpayer Year/Period Ended
ORG 42/31/20XX
Address 12/31/20XX

; 12/31/20XX
City, State

to do so. The web site also speaks to the independence of the bars, and its lack of
control over them by offering that by incorporating, “you keep control of your own club’.

The taxpayer’s constitution also addresses this ten member rule; yet the document
contains no provisions nor does the taxpayer, by its own statements, conduct any
follow-up activities to assure that the bars are complying with the membership
requirements. The information offered by review of the taxpayer's own administrative
files for each of its subordinates provided no information with regard to membership for
most of its subordinates. For those organizations that did comply with the constitution
and secure members and provide the requested proof of veteran status of the
members, the taxpayer’s administrative records for these entities did not contain any
financial information for any of its subordinates.

An organization described in section 501(c)(19) of the Code carries out activities in
furtherance of its exempt purposes only when the activities are carried out exclusively in
furtherance of the purposes listed in section 1.501(c)(19)-1(c) of the regulations.
Veterans’ organizations exempt under § 501(c)(19) of the Code have been permitted
broad purposes by Congress. They promote Americanism, sponsor youth activities,
provide color guards, conduct patriotic ceremonies and functions, and conduct
community activities. Many also conduct social activities among their members. Social
and recreational activities are only exempt activities if conducted among post members.
Such member exclusive activities include the operation of a bar and/or restaurant,
gambling, and dinners and dances.

Where participation in a § 501(c)(19) organization is furnished to nonmembers who
provide payment for such goods or services, their furnishing is outside the scope of
section 1.501(c)(19)-1(c) of the regulations. Generally if an organization has not kept
adequate books and records concerning its financial transactions with nonmembers
and more than 50 percent of its gross receipts are derived from sales transaction (such
as restaurant and bar sales), the presumption will be that the organization is not
primarily engaged in section 501(c)(19) activities.

Issue 2--Conclusion:

The analysis of the facts and circumstance as provided by the taxpayer provided that
neither the taxpayer, nor any of its subordinates meet the membership requirements of
section 501(c)(19) of the Code. It is this fact that caused CO-1 to form the taxpayer as
one of its auxiliaries and later an independently exempt organization with its own group
ruling.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -37-

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX

12/31/20XX
City, State

The facts also provide that the taxpayer advised the members that it may conduct
business with the general public, requiring only an initial ten members for inclusion in
the taxpayer’s group exemption. As such the presumption is that for the two
organizations that did follow and in one case exceed the member requirements, that the
patronage of the facilities included non-members, however no information was provided
to show how receipts from these members compared to total receipts of the bars. The
taxpayei did not show that its subordinates met the record keeping requirements of
Revenue Procedure 71-17, when the fact provide the taxpayer was certainly aware of
them.

During the years under examination the taxpayer had no permanent mechanism in
place to maintain records to show that its subordinates took steps to distinguish
between income from veterans and non-veteran income, social members, and income
from the general public derived from the bar. In fact, again the facts support that it was
this record keeping requirement that the taxpayer was attempting to negate by
reforming itself as a § 501(c)(4) organization.

Generally, if an organization has not kept adequate books and records concerning its
financial transactions with non-members and more than 50 percent of its gross receipts
are derived from sales transactions, the presumption will be that the organization’s
exempt status should be revoked because it is not primarily engaged in section
501(c)(19) activities.

As there is no information in place as to the exact income of the taxpayer's
subordinates with regard to their activities, including the bar activities, the subordinates
would not qualify for exemption under § 501(c)(19) of the Code.

As the taxpayer's primary activity is to provide administrative services to entities, which
by its own admission, and is supported by an analysis of the facts and its records, is
consistent with a commercially operated establishment that provides such service; and
that service is provided to establishments which, again by the taxpayer's own
admission, and also supported by the analysis of the books and records, carrying on a
business, a bar, in a manner consistent with entities operated for profit, the taxpayer
does not meet the requirements for consideration of exemption under section
501(c)(19) of the Code.

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Issue 3--Rationale:

As organization’s exempt under section 501(c)(7), the taxpayer would be required to
maintain records to establish that it, and each of its subordinates so classified, meet the

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -38-

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

am

Name of Taxpayer Year/Period Ended
ORG 42/31/20XX
Address 12/31/20XX

12/31/20XX
City, State

IRC § 501(c)(7) membership requirements. Clearly the taxpayer, and for the most part,
its subordinates do not meet such requirement, as per the taxpayer such is the reason
it sought exemption under § 501(c)(4), converting from an organization recognized
under § 501(c)(19).

The difficulty with the taxpayer being classified under section 501(c)(7) of the Code is
that it would need to maintain records showing the use of the bars (member, auxiliary
member, bona fide guest and nonmember use). See Rev. Proc. 71-17, and section
6001 of the Code. Exemption under § 501(c)(7) of the Code limits the receipts of non-
member income from the use of club facilities to 15% of total gross receipts. The
taxpayer maintained no records showing non-member use, or income received from
either members or non-members, therefore it can not be ascertained what if any
qualifies as non-taxable income.

Issue 3--Conclusion:

The taxpayer has not established that neither it nor its subordinates meet the provisions
for exemption under § 501(c)(7) of the Code.

Conclusion:

Pursuant to the conclusions noted above. The taxpayer does not qualify for continued
exemption under section 501(c)(4) of the Code because it has not been established
that the taxpayer is primarily engaged in social welfare activities within the meaning of
the statute. The facts do not support that the subordinate organizations of the taxpayer
operate within the meaning of section 501(c)(4), and therefore the taxpayer's
administrative services afforded these subordinates are no different than those offered
by a firm whose primary trade or business is the offering of such services.

The facts as well do not support the taxpayer's qualification for continued exemption
under either sections 501(c)(19) and 501(c)(7) of the Code, as the taxpayer by its own
admission does not meet the membership requirements for such exempt status.
Additionally, the facts do not support that any of the taxpayer’s subordinate
organizations meet either the membership requirements of either section of the Code.

It is therefore proposed that the exempt status granted ORG under section 501(a) of
the Internal Revenue Code as an organization described in § 501(c)(4) be revoked.
The effective date of the revocation is January 1, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -39-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit:
co Explanation of Items
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
Address 12/31/20XX
City ‘State 42/31/20XX
ty,

As a taxable entity, you are required to file Form 1120 “U.S. Corporation Income Tax
Return’. For additional information for filing the income tax return, please consult Form

1120 Instructions.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -40-