1332014: IRS proposes revoking a fraternal organization's tax exemption

Plain-English summary

The IRS determined that an organization did not qualify for exemption under IRC § 501(c)(8) as a fraternal beneficiary society. The organization rented halls and other facilities to the public, was controlled by a parent organization, and did not provide membership information or show that it operated under an active lodge system. The IRS also found that the organization had not shown that it provided qualifying life, sick, accident, or similar benefits to members or dependents. The determination states that the exemption was revoked effective the first day of the year in which the organization was found not to be operated exclusively for exempt purposes.

Ruling snapshot

• Question: Does the organization qualify for exemption as a fraternal beneficiary society under IRC § 501(c)(8)?
• Outcome: Revocation, the exemption was determined to be revoked.
• Key authorities: IRC § 501(c)(8); Treas. Reg. § 1.501(c)(8)-1; IRC § 6110.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE Exempt Organization Examinations

TAX EXEMPT AND UIL: 501.08-01

GOVERNMENT ENTITIES
DIVISION

September 5, 2008

Number: 201332014 Taxpayer Identification Number:
Release Date: 8/9/2013
Form:
LEGEND:
ORG= Name of Organization Tax Year(s) Ended:

ADDRESS= ADDRESS OF ORG
Person to Contact/ID Number:

ORG

ADDRESS Contact Numbers:
Telephone:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

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

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

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

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

Letter 3610 (04-2002)
Catalog Number 34801V

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

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

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

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

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Vicki L. Hansen
Acting Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
April 30, 20xx
ORG, Inc. NUM Form 990 April 30, 20xx
Legend:

ORG= Name of ORGANIZATION
Property= Name of Property

Year = xx

NUM = Identifying Number
Parent = Name of Parent

Issues

1. Whether the organization qualifies for exemption from federal income tax as an organization described
   in section 501(c)(8) of the Code? .

Facts
ORG, a 501(c)(8) tax exempt organization was resulted of a prior IRS audit in 19xx. Prior to 19xx audit,
ORG was tax exempted under 501(c)(7) Private Social Club.

Both ORG and Parent are located at same address at Address of Parent. Per interview with ORG officers
and manager, ORG is the legal owner of the property of Address of Parent. ORG is controlled by board of
Parent.

ORG has two halls available for rental. The maximum capacity of upper hall is limited to 500 people and
lower hall at 300. Both halls are available for rent to the general public and Parent members at same price.
In addition, the clubroom, bar, kitchens, and staffs are available for rent to the general public and Parent
members. In connection with the hall rentals, ORG may also provide catering services to the renters. Per
interview with the manager, majority of rental income and catering service revenue were from general
public. The organization also advertised reception hall rentals at local bridal service newspaper.

During the examination process, the officers were not able to provide membership information or member
listings. No membership fees were charged and reported on the Form 990 return. Per interview with the
officers and the manager, it is determined ORG does not have members on its own but Parent does

ORG also operates a bar which is opened to Parent’s members and general public. Per interview with the
officers and the manager, the bar is mainly utilized by Parents members.

During examination process, the POA believe that prior audit may have created a safe-haven for this audit.
POA agreed to provide final finding by July 31, 20xx. POA did not provide any information by July 31,
20xx. On August 8, 20xx agent called CPA and requested POA to provide safe-haven findings in writing or
provide Form 1120 for fiscal year 20xx and 20xx by August 18, 20xx. As of September 2nd, 20xx, POA has
not provide any information requested for or contact agent for extension.

Department of the Treasury-Internal Revenue Service

Form 886-A (1-1994) Catalog Number 20810W — Page publish.no.irs.gov

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
April 30, 20xx
ORG, Inc. NUM Form 990 April 30, 20xx

Law

Section 501(c)(8) of the Code describes certain fraternal beneficiary societies, orders, or associations which
are exempt from taxation under section 501(a) of the Code. The exemption applies to fraternal organizations
which operate under the lodge system, or for the exclusive benefit of the members of a fraternity itself
operating under the lodge system, and which provide for the payment of life, sick, accident or other benefits
to members of the organizations or their dependents.

Section 39.101(3)-1 of Regulations 118, made applicable under the 1954 Code by virtue of Treasury
Decision 6091, C.B. 1954-2, 47, provides that ‘operating under the lodge system’ means carrying on
activities under a form of organization that comprises local branches, chartered by a parent organization and
largely self-governing, called lodges, chapters, or the like. On the basis of the facts in the instant case, it is
held that the association is not operating under the lodge system or for the exclusive benefit of the members
of an organization so operating. Accordingly, such association is not entitled to exemption from Federal
income tax as an organization described in section 501(c)(8) of the Internal Revenue Code of 1954.

Section 1.501(c)(8)-1 of the Income Tax Regulations states that a fraternal beneficiary society is exempt
from tax only if operated under the "lodge system" or for the exclusive benefit of the members so operating.
"Operating under the lodge system" means carrying on its activities under a form of organization that
comprises local branches, chartered by a parent organization and largely self-governing, called lodges,
chapters, or the like. In order to be exempt it is also necessary that the society have an established system for
the payment to its members or their dependents of life, sick, accident, or other benefits.

Rev. Rul. 84-48, 1984-1 CB 133, holds Section 501(c)(8) of the Code provides for the exemption from
federal income tax of fraternal beneficiary societies, orders, or associations that operate under the lodge
system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and
that provide for the payment of life, sick, accident, or other benefits to the members of such societies or their
dependents.

The term "other benefits" as used in section 501(c)(8) of the Code, is limited by the type of benefit specified
in that section. It is applicable only to those benefits which are of a like kind and nature to those enumerated.

Historically, sick benefits have been understood to include benefits designed to compensate for loss of
income during a period of illness, and accident benefits have been understood to encompass benefits payable
due to a loss of earning power resulting from an injury. For a benefit to be of a like kind and nature to sick
or accident benefits and, therefore, to be included within the term "other benefits" under section 501(c)(8) of
the Code, the benefit must be similar in nature to protection designed to compensate for expenses resulting
from bodily injury or loss of earning power.

National Union v. Marlow 374 F.775, 778 (1896) indicates what constitutes a fraternal beneficiary society.
The case held, in part, . . . a fraternal-beneficial society . .. would be one whose members have adopted the
same, or a very similar calling, avocation, or profession, or who are working in union to accomplish some

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev, January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
April 30, 20xx
ORG, Inc. NUM Form 990 April 30, 20xx

worthy object, and who for that reason have banded themselves together as an association or society to aid
and assist one another, and to promote the common cause. The term fraternal can properly be applied to
such an associations, for the reason that the pursuit of a common object, calling, or profession usually has a
tendency to create a brotherly feeling among those who are thus engaged . . .. Many of these associations
make a practice of assisting their sick and disabled members, and of extending substantial aid to the families
of deceased members. Their work is at the same time of a beneficial and fraternal character, because they
aim to improve the condition of a class of persons who are engaged in a common pursuit, and to unite them
by a stronger bond of sympathy and interest ....

Philadelphia & Reading Relief Association v. Commissioner , 4. B.T.A. 713, at 725 (1926), provides that
the organization was denied exemption because it lacked the necessary fraternalistic element. The court
noted the association's membership consisted of individuals whose vocations were as numerous and diverse
as the classifications of jobs of a railroad company; membership was open to all employees of the company;
the only motive for the association's existence was a mercenary one (to provide insurance benefits); and the
organization had neither lodges, rituals, ceremonials, nor regalia commonly associated with fraternal
associations.

Taxpayer Position

The organization was audited in 19xx by Internal Revenue Service Exempt Organization division.

The organization was converted form 501(c)(7) to 501(c)(8) as result of audit. Since then, the organization
has been operated as it was in 19xx. None of activities were changed or organization structures were
changed since 19xx audit. The POA believe that prior audit may have created a safe haven for this audit.
Possible safe haven. POA agreed to provide final finding by 07/31/20xx

Government Position

In order to qualify for exemption under section Code Sec. 501(a) and Code Sec. 501(c)(8) if:

1. it operates under the lodge system for the exclusive benefit of the members of a fraternity itself
   operating under the lodge system, and

2. it provides for the payment of life, sick, accident, or other benefits to the members of such society, order,
   or association or their dependents.

Operating under the lodge system requires at a minimum, two active entities, a parent and a subordinate.
Activities must be carried out under a form of organization that comprises local branches called lodges,
chapters, and the like. The local branches must be chartered by the parent organization and largely self-
governed. See Section 1.501(c)(8)-1 of the Income Tax Regulations.

You are similar to the two organizations described in Rev. Rul. 63-190 and Rev. Rul. 55-495 that were
denied exemption under section 501(c)(8) of the Code, because, like these organizations, You have not
demonstrated that you operate under the lodge system. During field examination on July 8th, 9th, 10th of

Department of the Treasury-Internal Revenue Service

Form 886-A (1-1994) Catalog Number 20810W — Page 3 publish.no.irs.gov

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
April 30, 20xx
ORG, Inc. NUM Form 990 April 30, 20xx

20xx, you did not prove that the activities are carried on under a form of organization that comprises local
branches that are chartered by a parent organization and that are largely self-governing.

Furthermore, you have not proven that it carry on fraternal activities that are required under section
501(c)(8) of the Code. You failure to provide membership information during the examination process. Per
interview with the facility manager and officers of your organization, it is determined your organization
does not have members.

An additional requirement of section 501(c)(8) of the Code is that an organization provide for the payment
of life, sick, accident, or other benefits to members of such society, order, or association or their dependents.
During the examination process, your organization has not demonstrated that your organization provided for
the payment of life, sick, accident, or other benefits to your members or their dependents or the members
and dependents of other 501(c)(8) organization. When asked whether you provide for the payment of life,
sick, or accident insurance, you responded that you did not provide for the payment of life, sick, or accident
insurance.

Conclusion

Based on the facts and the law presented above, we have determined that you do not meet the requirements
for tax exemption under section 501(c)(8) of the Code as a fraternal beneficiary society operating under the
lodge system that provides life, sick, accident or other benefits to members. You do not have a fraternal
purpose, do not operate under the lodge system, and you do not provide life, sick, accident or other benefits
to members.

Accordingly, you do not qualify for exemption as an organization described in section 501(c)(8) of the
Code. Your exemption under section 501(c)(8) of the Internal Revenue Code is revoked effective May 1st,
20xx, the first day of the year that we determined that you are not operated exclusively for exempt purposes.
You are required to file Forms 1120 and pay Federal income tax for all years beginning after May 1st, 20xx.

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service