IRS revokes a fraternal society's 501(c)(8) status because it does not operate under the lodge system

Plain-English summary

A "fraternal beneficiary society" can be exempt from federal income tax under Internal Revenue Code § 501(c)(8) only if it meets two requirements: it must operate under the "lodge system" (local, largely self-governing branches chartered by a parent organization), and it must provide life, sick, accident, or similar benefits to its members. This organization, a members' society that grew out of a vocal-music club, paid sick and death benefits and ran a social club for members (with income from bar sales and amusement devices), but it had no lodge structure at all. Because it does not operate under the lodge system, the IRS determined it fails § 501(c)(8). The IRS also explained it cannot instead qualify as a § 501(c)(7) social club or a § 501(c)(4) civic league, because an organization that combines running a members' social club with paying sick and death benefits does not fit cleanly within any single exemption category (citing Revenue Ruling 63-190 and older Tax Court cases). The IRS issued a final revocation effective the tax year at issue, and the organization must now file regular corporate income tax returns (Form 1120). 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 for exemption under § 501(c)(8) when it does not operate under the lodge system?
• Outcome: Revocation (exempt status revoked; also does not qualify under § 501(c)(4) or (c)(7))
• Key authorities: IRC § 501(c)(8), (c)(7), (c)(4); Treas. Reg. § 1.501(c)(8)-1; Rev. Rul. 63-190; Allied Trades Club, Inc. v. Commissioner, 23 T.C. 1017 (1955); Allgemeiner Arbeiter Verein v. Commissioner, 25 T.C. 471 (1955)

Full text (IRS public release)

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
Release Number: 201844011 Date: July 5, 2018
Release Date: 11/2/2018
UIL Code: 501.03-00 Taxpayer Identification Number:

Person to Contact: [redacted]
Employee Identification Number: [redacted]

Employee Telephone Number: [redacted]
(Phone)
(Fax)

CERTIFIED MAIL - RETURN RECEIPT
Dear

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 June 30, 20XX.

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

You are not operated under the lodge system. 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 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 June 30, 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: [redacted]
Department of the Treasury
Internal Revenue Service                    February [redacted]
Tax Exempt and Government Entities          Taxpayer Identification Number: [redacted]

Exempt Organizations Examinations
Form: [redacted]

Tax Year(s) Ended: [redacted]

Person to Contact/iD Number: [redacted]

Contact Numbers:
Telephone: [redacted]
Fax: [redacted]
Manager's Name/!D Number: [redacted]

Manager's Contact Number: [redacted]

Response due date: [redacted]

Certified Mail ~ Return Receipt Requested
Dear

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(8) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action - Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren't an organization described in section 501(c)(8).

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 revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Effect of revocation status
if you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

- If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
requesting technical advice. If we issue a determination letter to you based on a technical
advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't 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:

Internal Revenue Service
Office of the Taxpayer Advocate

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

For additional information

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.

Thank you for your cooperation.

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

3 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
20XX
ISSUE
Whether should continue to qualify for exemption as an organization

described in the Internal Revenue Code (IRC) section 501(c)(8).

FACTS

was chartered under the laws of Bucks County, on April
29, 15XX for the purpose of the following: :

"Maintaining a society for the promotion and cultivation of the science of vocal music, and to aid and assist
is members in case of sickness and distress and for the promotion of social intercourse and enjoyment
among each other."

The organization was incorporated under the laws of the state of as a Charitable organization
on May 4, 18XX for the above stated purpose.

The organization received its determination letter on August 13,20XX.

The organization is an independent organization and has no subordinates.
The organization is not operated under the lodge system.

The organization's receipts are derived from membership dues and operation of a social club for its
members, the receipts from the club are substantial and are derived from bar sales and various
amusement devices.

LAW

Section 501(c) of the code describes certain organizations exempt from federal income tax under section
501(a) and as pertinent here reads, in part as follows:

(4) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of
social welfare.

(7) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes,
no part of the net earnings of which inures to the benefit of any private shareholder.

(8) Fraternal beneficiary societies, orders, or associations

(A) Operate under the lodge system or for the exclusive benefit of the members of a fraternity itself
operating under the lodge system and

(B) Provide for the payment of life, sick, accident or other benefits to the members of such society, order
or association and their dependents.

Form 886-A (1-1994) Catalog Number 20810W Page 1 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

20XX

Internal Revenue Regulation 1.501(c)(8)-1 Fraternal Beneficiary Societies

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.

Revenue Ruling 63-190, 1963-2 C.B. 212 states in part:

A non-profit organization (not operated under the lodge system), which maintains a social club for member
and also provides sick and death benefits for members and their beneficiaries, does not qualify for
exemption from Federal Income tax as either a social club under section 501(c)(7), a civic league under
section 501(c)(4), or a fraternal beneficiary society under section 501(c)(8) of the Internal Revenue Code of
1954.

Operating under the lodge system, as contemplated in section 501(c)(8) of the Code, means carrying out
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.

The organization maintains a social club for its members as described in section 501(c)(7) and, in addition,
pays sick and death payments to its members. The payment of sick and death benefits is not a function of
a social club. Allied Trades Club, Inc. v. Commissioner, 23 T.C. 1017 (1955), affirmed 228 Fed. (2d) 906
(1956).

Organizations described in section 501(c)(4) of the Code comprise those not organized for profit but
operated exclusively for purposes beneficial to the community as a whole, and in general, include
organizations engaged in promoting the welfare of mankind. Section 1.501(c)(4) of the Income Tax
Regulations provides that an organization is not operated primarily for the promotion of social welfare if its
primary activity is operating a social club for the benefit, pleasure, or recreation of its members.

There is no provision in the Code for exemption from income tax of an organization having a combination of
functions such as the one herein.

A case in point is Allgemeiner Arbeiter Verin v. Commissioner, 25 T.C. 471 (1955), affirmed Fed. (2d) 605
(1956). In that case the tax court of the United States had before it the question of exemption of an
organization which was formed to provide mutual assistance of sickness or death of its members, but which
expanded its scope to include intensive social activities.

The court held that where one activity carried on by the organization prevents it from satisfying the
requirements of section 101(9) of the Internal Revenue Code of 1939 and section 101(10) of the 1939
Code, the petitioner is not an exempt organization, notwithstanding that an organization carry on its sole
activity either of the two principal functions carried on by the petitioner might qualify for an exemption under
one of the two foregoing provisions.

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

20XX

The court stated there is no statutory authority, whatever the equities, permitting the exemption of an
organization, however worthy, which cannot fit itself within one of the various subdivisions of section 101 of
the 1939 (now section 501 of the 1954 Code).

Operating under the lodge system as contemplated in section 501(c)(8) of the Code, 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. Section 1.501(c)(8)-1(a) of the regulations.

is not operated under the lodge system.

In view of the foregoing, the organization does not qualify for exemptions from federal income tax as
organization described in section 501(c)(4), (7), or (8) of the Code.

TAXPAYER'S POSITION

The organization has not declared a position.

GOVERNMENT'S POSITION AND CONCLUSION

The organization is not operated under a lodge system, thus it fails to meet the requirements of section
501(c)(8) in which it must operate under the lodge system or for the benefit of the members of a fraternity
itself operating under the lodge system.

If you agree to this conclusion please sign the attached Forms.

If you disagree please submit a statement of your position.

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service