IRS revokes a heritage club's 501(c)(8) status for having no lodge system and paying no member benefits

Plain-English summary

A "fraternal beneficiary society" qualifies for tax exemption under Internal Revenue Code § 501(c)(8) only if it both operates under the "lodge system" (local, largely self-governing branches chartered by a parent organization) and provides life, sick, accident, or similar benefits to its members. This organization began as a local chapter under the group exemption of a national heritage organization, then broke away to stand on its own and obtained its own § 501(c)(8) recognition. On examination, the IRS found it met neither core requirement: its Form 990 reported zero benefits paid to members, and on its own Form 1024 it had stated it does not operate under the lodge system. In practice it functioned as a social club celebrating a common heritage (its activities included a weekly public pasta dinner), not a fraternal benefit society. Because it neither operates under the lodge system nor pays member benefits, the IRS issued a final adverse determination revoking its exemption effective the tax year at issue. The organization must now file corporate income tax returns on Form 1120, and contributions to it are no longer deductible. The organization's representative indicated it might agree with the revocation and later refile under a different exemption category. The release bundles the final revocation letter, the proposed revocation letter, and the examiner's Form 886-A analysis.

Ruling snapshot

• Question: Does the organization still qualify under § 501(c)(8) when it does not operate under the lodge system and pays no life, sick, or accident benefits to members?
• Outcome: Revocation (exempt status revoked effective the tax year at issue; must file Form 1120)
• Key authorities: IRC § 501(c)(8); Treas. Reg. § 1.501(c)(8)-1 (lodge system); National Union v. Marlow, 74 F. 775 (1896); Rev. Rul. 55-495; Rev. Rul. 64-194; I.T. 1516

Full text (IRS public release)

Scanned document; transcription proofread from the IRS OCR text. The standard IRS letterhead and the repeated Form 886-A page furniture were normalized to a consistent form; redacted identifiers and amounts are marked [redacted]; unrecoverable OCR spots are marked [illegible]; and "20XX" and "$0" are the IRS's own redaction placeholders in the release. Wording is otherwise verbatim, including the examiner's original spelling and capitalization.

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: July 26, 2018

Number: 201843015                          Taxpayer Identification Number:
Release Date: 10/26/2018                   [redacted]

                                           Person to Contact:
                                           [redacted]
                                           Employee Identification Number:
                                           [redacted]
                                           Employee Telephone Number:
                                           [redacted] (Phone)
                                           [redacted] (Fax)

UIL: 501.03-00

CERTIFIED MAIL — RETURN RECEIPT
Dear [redacted]:

This is a final adverse determination regarding your exempt status under section 501(c)(8) of the
Internal Revenue Code. You are no longer exempt under section 501(a) of the Code for the tax
year ending December 31, 20XX.

The revocation of your exempt status was made for the following reason(s):

You are not operated under the lodge system. Also, you do not provide for the payment of life,
sickness, accident, or other benefits to your members. Thus, you fail to meet the requirements of
IRC 501(c)(8) which requires an organization to operate under the lodge system or for the
exclusive benefit of the members of a fraternity itself operating under the lodge system as well as
to provide for the payment of life, sickness, accident, or other benefits to its members in order to
be exempt under IRC 501(c)(8).

You are required to file an income tax return on Form 1120 for the tax year ending December 31,
20XX with the appropriate Service Center in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed should a
petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

If you decide to contest this determination, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment
by referring to the enclosed Publication 892. You may write to the courts at the following
addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or
you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892


Date: March 8, 2018

Internal Revenue Service                   Taxpayer Identification Number:
Tax Exempt and Government Entities         [redacted]
Exempt Organizations Examinations
Department of the Treasury                 Form:
                                           Tax Year(s) Ended:
                                           Person to Contact:
                                           Employee ID:
                                           Telephone:
                                           Fax:
                                           Manager's Contact Information:
                                           Employee ID:
                                           Telephone:
                                           Response Due Date:

CERTIFIED MAIL — Return Receipt Requested
Dear [redacted]:

Why you're receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue
Code (IRC) Section 501(c)(8).

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(8) for the periods
above.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
letter.
2. Send any information you want us to consider.
3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
send additional information as stated in 1 and 2, above, you'll still be able to file a protest
with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn't apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
Government Entities) if you feel the issue hasn't been addressed in published precedent
or has been treated inconsistently by the IRS.

If you're considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can
help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a
hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you
qualify for TAS assistance, which is always free, TAS will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

For additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).
If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018
Publication 3498
Publication 892

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F


Form 886-A                Explanation of Items                Schedule number or exhibit: 1
(May 2017)                                                    issued 03/08/18
Name of taxpayer: [redacted]    Tax Identification Number (last 4 digits): [redacted]    Year/Period ended: December 31, 20XX

ISSUE: Does the organization continue to qualify for exemption under section 501(c)(8) of the
Internal Revenue Code ("IRC")?

FACTS:

Zero dollars are reported in Part I, line 14 of Form 990 (Benefits paid to or for members).
Likewise, no amount is reported on line 4 of Part IX (Benefits paid to or for members.)

Part III of the 20XX form 990 indicates that the org did not undertake any significant program
services during the year which were not listed for the prior year and that the org did not cease
conducting or make significant changes in how it conducts any program services.

Part VI, Section C (disclosure), item 4 replies to the requirement that the org make its form 1024,
990 and 990-T available to the public. The question asks how they are made available in reply to
which the org checked the option for "upon request". Schedule O expands on this by entering the
text: "No documents available to the public."

In reply to my request for comments on the Schedule O statement, the POA referred to the "upon
request" reply. The reply appears to be missing some text.

Four classes of Members are reported as follows on the form 1024 — Honorary Social, Meritorious
and Regular. Regular members with birth or descent. Meritorious members are nominated
for distinguished service, exemplary conduct, community achievements and exemplary moral/
social achievements. Honorary members are "past members who have had a significant
contribution to the lodge and the community". "Social members participate in lodge activities have
voting rights and may be elected to office. This class is open to the public, but may not fall into
any membership category listed above."

The organization has loans owed to members for renovations. The org claims that these loans
were disclosed on the 20XX Form 990 Schedule L. The org also discloses their conflict of interest
policy prohibiting personal benefit. Generally, if after due diligence no independent offers are
acceptable, then the Board of Directors decides if the offer is fair to, and in the best interests of
[the organization].

Loans and other payables to current officers, directors, trustees, key employees, highest
compensated employee, and disqualified persons were reported in Part X, line 22 of the 20XX
form 990 as $0. The prior year end reflected a balance for this line of $0. The original amount of
the loan is disclosed on Schedule L of the 20XX form 990 to be $0.

Information Document Request — Form 4564 was sent to the org and specifically asked if the
organization receives contributions which are deductible by donors. The POA replied that "The
[organization] is a member supported organization however donors do not receive tax
deductible contributions for amounts given."

It is noted that as of the Aug 4, 20XX letter replying to a request for clarification of exempt status,
the right to deductibility of donations was affirmed under Section 501(c)(3), and classification as a
public charity approved under Section 509(a)(1) and 170(b)(1)(a)(vi).

The organization reports in Part V of the 20XX form 990 that it did not solicit any contributions that
were not taxable as charitable contributions.

An inspection of the admin file disclosed that the org discloses in Part I is selects option "f" to
indicate that it was applying on Form 1024 for exemption as a Section 501(c)(8) organization
Fraternal beneficiary societies, etc., providing life, sick, accident or other benefits. In Schedule E
of the same Form 1024, the org replies to question 2a that it does not operate under the lodge
system. In reply to question 2b, replies that they do or will operate for the exclusive
benefit of the members of an organization operating under a lodge system. Question 4 of this part
asks: "Is the organization a parent or a [subordinate]?" The answer provided to this question is
"No".

It is noted that in the cover letter for form 1024, dated November 4, 20XX, [the organization]
is twice referred to by the POA as a ministry.

Articles for amendment of the club name were filed on October 13, 20XX. The name changed
from [redacted] to the new name [redacted].

Form 1024 also contains the following question/answer for Part II, question 4:

If the organization is the outgrowth or continuation of any form of predecessor, state the name of
each predecessor, the period during which it was in existence, and the reasons for its termination.
Submit copies of all papers by which any transfer of assets was effected.

The reply was: "The organization has always been a separate legal entity. However, it fell under
the group exemption of the National Organization. At one time, it had filed its own exemption,
which was approved. However, it is now filing paperwork so that it may have its own 501(c)(8)
exemption apart from the group exemption of the National Organization."

In Part IV of the Form 1024, [the org] replied to a section that did not pertain to it, but rather to
orgs which are exempt under Sections 501(c)(9) and (c)(17) who are requesting additional time to
secure tax-exemption. In their response, however, they indicate that they should be eligible to
avail themselves of additional time to file.

Letter 948, signed by Director of Exempt Organizations Tamara Ripperda and dated May 1, 20XX
granted tax exemption to the organization under Section 501(c)(8).

The addendum to the May 1 letter begins with the statement: "Our records indicate that you were
previously tax-exempt as a subordinate under group exemption number 3610. Because you
applied for and have been granted your own individual tax-exempt status, you no longer rely on
your affiliation with a parent organization for recognition of your tax-exemption."

The addendum continues with a second and final provision: "If, in the future, you choose to
become a subordinate under a group ruling, you will lose your individual recognition of tax-exempt
status. Moreover, if you become a subordinate under a group ruling and your parent organization
loses its tax-exempt status, you also will lose your exempt status. To reestablish your individual
tax-exemption after rejoining a group exemption, you will be required to reapply and pay the
appropriate user fee."

The Information Document Request ("IDR"), dated January 11, 20XX, asked the organization to
identify the types of benefits provided to membership including, if applicable, the payment of life,
sickness, accident or other insurance benefits to the members or their dependents.

In reply to this question, the org stated in their letter dated Feb 2, 20XX, that "As with the
[redacted], members did not receive any of the benefits that you have listed in your letter." However, they
did "receive benefits as a social club" which included various events, organizational activities, and
community programs.

The Feb 2, 20XX letter further states that the organization, once was a component unit of the
[redacted] until, on November 4, 20XX, the [redacted] broke away from the [redacted]
and completed the 1024 application as a stand-alone organization for recognition as a nonprofit
entity.

The signage shown in the [illegible] of the [redacted] reads: "Social Club of [redacted]". The article implies that the establishment is open to the public with the statement:
"... when the local group ([redacted]), whose Monday pasta offerings beckon
passers-by ... " No employees or employee compensation is reported on the 20XX form 990,
despite the labor involved in a weekly pasta dinner.

It is reported by [redacted] (attorney for the Statewide Lodge suing the local group)
that funds have been raised by the group under the auspices of the [redacted],
described on its website as "the largest and oldest national organization for men and
women of [redacted] heritage in the United States." The national group, which began as a mutual aid
society for early immigrants, funds causes such as educational programs, cultural
preservation, medical research, disaster relief and veterans' needs.

The local group which refers to itself as the [redacted] on its website
lists among its charitable works food drives for the [redacted] and
donations to [redacted] and its work with [redacted].
Even so, said [redacted] (the lawyer suing on behalf of the State [redacted]), because the group opted to leave the national organization, its money and
property rightly should be administered by [redacted]. The law states that when members
cut ties with and hierarchal body, such as a church, "they take nothing with them except for their
membership," he said.

LAW:

To be exempt under IRC section 501(c)(8), a fraternal beneficiary society, order, or association
must meet the following requirements:
1) It must have a fraternal purpose
2) It must operate under the lodge system or for the exclusive benefit of the members of
a fraternal organization itself operating under the lodge system. Operating under the
lodge system requires, at a minimum, two active entities: (i) a parent organization;
and (ii) a subordinate chartered by the parent and largely self-governing
3) It must provide for the payment of life, sickness, accident, or other benefits to the
members of such society, order, or association or their dependents
4) An organization that provides benefits to some, but not all, of its members may
qualify for exemption so long as most of the members are eligible for benefits, and
criteria for excluding certain members are reasonable.

Perhaps the leading judicial pronouncement of what constitutes a "fraternal beneficiary society" is
in this extract from National Union v. Marlow 374 F. 775, 778 (1896): ***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 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 association, 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.***

The Regulations under IRC 501(c)(8) states, in part, that "operating under the lodge system"
means carrying on its activities under a form of organization that comprises local branches that
are chartered by a parent organization and that are largely self-governing, called lodges, chapters,
or the like. Rev. Rul. 55-495, 1955-2 C.B. 259, holds that an organization which does
not have a parent organization or subordinate branches does not qualify under IRC 501(c)(8)
because it does not operate under the lodge system.

Revenue Ruling 55-495 deals with an organization which did provide benefits to members but did
not operate under the lodge system, or for the exclusive benefit of the members of an organization
so operating.

An entity seeking exemption under IRC 501(c)(8) must have an established system for the
payment of life, sick, accident, or other benefits to its members or their dependents.

It is not essential that every member of a fraternal beneficiary society be covered by its program of
benefits for the organization to qualify as exempt under IRC 501(c)(8). Rev. Rul. 64-194, 1964-2
C.B. 149, provides that a fraternal association having two classes of members (beneficial and
social) qualifies for exemption under IRC 501(c)(8) even though its social members are not
covered by its benefit program. Beneficial membership is available only to a member who joins
prior to his/her 50th birthday, but social membership is available to older persons.

An exempt fraternal organization must operate under the lodge system and provide for an
established system of benefit payments to its members and their dependents. It is not necessary
that either of these features predominate. (I.T. 1516 1-2 C.B. 180 (1922).) However, both
features must be substantially present; neither may be a sham.

GOVERNMENT POSITION: The organization fails to qualify for exemption under multiple
provisions: 1) The org does not provide for the payment of any financial benefits, as required for
an org that is tax exempt under Section 501(c)(8). 2) The org does not operate under the Lodge
system, also required. 3) Members are united by Social purpose of celebrating a common
heritage, but not for the payment of benefits for accidents. 4) The majority of members do not
qualify for benefits as benefits are provided to none of the members. The method of excluding
members is therefore considered unreasonable.

TAXPAYER POSITION: The government position was discussed with POA [redacted]
CPA on 03/08/XX. The POA indicated that the organization may agree with the revocation of
exempt status, but that in the future would file with the IRS Form 1024 with another possible sub
section.

CONCLUSION: The org's tax exemption should be revoked & form 990's converted to
corporation tax forms 1120 effective as of January 1, 20XX. Any deductions taken by donors will
be disallowed from the effective date.

Catalog Number 20810W                Form 886-A (Rev. 5-2017)