IRS revokes a veterans-group auxiliary's exemption because its youth baseball players do not meet the membership rules

Plain-English summary

The IRS revoked the § 501(c)(19) exemption of an auxiliary unit included in a veterans organization's group ruling. The auxiliary's main activity was operating a community youth baseball team, and its members were underage players rather than veterans, spouses of veterans, relatives within two degrees of consanguinity, or qualifying cadets. The organization's vice president agreed that the group did not satisfy the membership requirements and was not an organization of cadets. The audit also described gaming used to help fund the team, but said any unrelated-business-income issue became irrelevant once exempt status was removed. The IRS removed the auxiliary from the central organization's group exemption and directed it to file Form 1120 for the stated periods. The report noted that a youth unit might seek recognition under another Code provision by filing Form 1023 or Form 1024.

Ruling snapshot

• Question: Does a veterans-organization auxiliary that operates a youth baseball team satisfy the membership requirements for exemption under IRC § 501(c)(19)?
• Outcome: Revocation (the organization agreed it did not meet the membership rules and was not an organization of cadets).
• Key authorities: IRC §§ 501(a), 501(c)(19), 170, 401, 502, 503, 512, and 7428; Treas. Reg. § 1.501(c)(19)-1.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: May 8, 2020

Taxpayer ID Number:
Number: 202052016 Form:

Release Date: 12/24/2020
Tax Period(s) Ended:

Person to Contact:

UIL: 501.19-00
Identification Number:

Telephone Number:

Fax Number:

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear

This is a final determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(19)
for the tax period above. Your exemption under group exemption number is revoked.

This letter isn’t a determination of your exempt status for any period(s) other than the tax period(s)
listed above. In the future, if you believe your organization qualifies for tax-exempt status and would
like to establish its status, you may request a determination from the Internal Revenue Service by filing
Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A,
Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code (as
applicable) or Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code and paying the required user fee.

Our adverse determination as to your exempt status was made for the following reasons:

You do not meet the membership requirements for exemption under IRC Section 501(c)(19)
and you are not an organization of cadets. Therefore, revocation of your exemption under
Section 501(c)(19) needs to occur, and you must be removed from the group exemption of your
central organization,

Organizations that are not exempt IRC section 501 generally are required to file federal income tax
returns and pay tax, where applicable. For further instructions, forms, and information please visit
www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of IRC Section 7428 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 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, NW
Washington, DC 20217

U. S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

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

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a
petition for declaratory judgment under IRC Section 7428.

You may be eligible for help from the Taxpayer Advocate Service (TAS). 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.

Taxpayer Advocate assistance can’t be used as substitute for established IRS procedures, formal
appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax
determination, nor extend the time fixed by law that you have to file a petition in 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 can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-
829-3676) or visiting our website at www.irs.gov/forms-pubs.

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

Enclosures: Sincerely,
Publication 892

Maria D. Hooke
Director, EO Examinations

Department of the Treasury Date:
Internal Revenue Service August 8, 2019
Tax Exempt and Government Entities Taxpayer Identification Number:
Exempt Organizations Examinations

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

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)(19).

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)(19) for the period
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 4621-A
Form 6018
IRS Pub. 892
IRS Pub. 3498

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

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
20XX

ISSUE

Whether the auxiliary unit is to be removed from the central organization's group ruling because
the unit does not meet the membership requirements for exemption under IRC section 501(c)(19)
and is not an organization of cadets.

FACTS

is tax-exempt under IRC section 501(c)(19) as
an auxiliary unit under group exemption number of the central
organization. Internal Revenue Service ("IRS") reports central organization's ruling date is
March, 19XX and reports establishment date is August, 19XX.

is a separate legal entity, with its own Employer Identification Number (EIN) and filed its
Articles of Incorporation on 9/15/20XX with the State of

under the legal name, . The organizational
purposes stated in their Articles of Incorporation are "to provide financial and logistical support for
the Additional youth sports and scholarships may
also be provided dependent on available funds." There are no amended Articles of Incorporation,
and did not adopt bylaws. The organization's primary operational activity is to run a
community youth baseball team called the but is
also known as the

is sponsored by a tax exempt IRC section 501(c)(19) local post
(" "). The local post is an corporation
formed on January 27, 19XX. Vice President, , has acknowledged his
organization uses the local post location for their mail drop and did not want IRS to change
address because it is a central location where mail can be gathered.

does conduct gaming activities with the intent hopefully to provide income for the operation
of the team other than funding from funding. ( received $0 from
for tax year ending December 31, 20XX.) uses the gaming permit the post secured
from . Because gaming income is not enough
requires additional funding from sponsorships, players fees, etc.

members are team participants who are under the age of eighteen and are the
team's baseball players. does not have members from the local post, , who
are members of local post within two degrees of consanguinity. This includes parents,
grandparents, brothers, sister and grandchildren, but does not include nieces or nephews of the
member, and is not an organization of cadets as defined in Treasury Regulations, "Cadets
(including only students in college or university ROTC programs or at Armed Services
academies)".

As stated runs a community youth baseball team called the . is
Vice President and he is also the head baseball coach and manager of the . The
participants are comprised of high school players from , , and and team
members play during months of June and July in a statewide league with teams from ;
, , , (0 teams), , and . The schedule
involves extensive travel, meals, equipment, fees, and many more related expenses.
states the 20XX season cost the Program $0 per player, and the Form 990 return reports
the 20XX season Program cost $0 ($0 / 0 players) per player.

Form 990 return for tax year end 12/31/20XX reports received income from baseball
players' membership dues totaling $0 and received $0 in other donations. As mentioned
$0 of the $0 in donations are donations received from tax-exempt IRC section 501(c)(19) local
post, , who sponsors as an auxiliary unit youth organization.

Form 990 return for tax year end 12/31/20XX reflects primary source of income is from
gaming. reported total gross income of $0 from gaming less $0 in direct expenses and
reported net gaming income of $0. Of the total gross receipts from gaming, received $0 from
self-directed pull-tab ticket sales to the public, $0 reported from both bingo and pull-tab sales
conducted by , an operator/Multiple-Beneficiary Permit (MBP) agreement (which
is a member receiving 0% of net bingo proceeds), and
$0 from vendor activity. Direct-gaming of pull-tab ticket sales are carried-on solely with
compensated persons, who are employees for months each calendar year. has
no employees for any other months in the calendar year. does not use the local post to
conduct its gaming activities. conducts its self-directed pull-tab gaming activities at a local
hockey association facility. The donates this space to to sell their pull-tab
tickets to the public.

Gaming activities carried on by is an unrelated business income (UBI) but UBI becomes
irrelevant if tax-exempt status is removed from the group ruling of
. did not provide a written response to Delinquency Notice letter 5077-B dated
7/8/20XX with a due date of 7/24/20XX, with attached Form 4564, Information Document Request,
IDR 4 and referenced previous IDR(s) 1, 2, and 3. IDR 4 limited information request to how
their organization 'meets' or 'does not meet' the membership requirements for an auxiliary unit
exempt under IRC section 501(c)(19), board minutes for calendar tax years 20XX, 20XX, and
20XX, copy of their bylaws, and provide IRS with a complete name and address of their central
organization. A written response to IDR 4 not provided, but during a telephone conversation on
7/29/20XX to follow-up on response to IDR 4, Vice President said to IRS he
agreed does not meet the membership requirements of IRC section 501(c)(19) and that
their organization is not organization of cadets. (Information requested in IDRs 1 - 3 not fully
provided to IRS but as mentioned above, but UBI becomes irrelevant if tax-exempt status is removed from the
group ruling of .)

Vice President, , expressed previously on the dates of 7/5/20XX their auxiliary
youth organization is not an organization of cadets and does not meet membership
requirements for an auxiliary tax-exempt under IRC section 501(c)(19).

stated he is working with an attorney and CPA (maybe without charge) to see if they can
apply for tax exemption under IRC section 501(c)(3).

An auxiliary may qualify for recognition of exemption under IRC 501(c)(3), (4), (7), (8), or (10). A
determination can be made only by considering all the organization's operational activities and
submit an Application Form(s) 1023 and/or 1024 to IRS Tax Exempt Governmental Entities
Exempt Organization Rulings and Agreements for this determination.

LAW

26 U.S.C.A. § 501, I.R.C. § 501
§ 501. Exemption from tax on corporations, certain trusts, etc.
(a) Exemption from taxation.--An organization described in subsection (c) or (d) or section
401(a) shall be exempt from taxation under this subtitle unless such exemption is denied
under section 502 or 503.

(c) List of exempt organizations. --The following organization is referred to in subsection (a):
(19) A post or organization of past or present members of the Armed Forces of the United
States, or an auxiliary unit or society of, or a trust or foundation for, any such post or
organization--
(A) organized in the United States or any of its possessions,

(B) at least 75 percent of the members of which are past or present members of the
Armed Forces of the United States and substantially all the other members of which
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 United
States or of cadets, and

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

26 C.F.R. § 1.501(c)(19)-1, Treas. Reg. § 1.501(c)(19)-1

§ 1.501(c)(19)-1 War veterans' organizations.
(a) In general. (1) For taxable years beginning after December 31, 1969, a veterans post or
organization which is organized in the United States or any of its possessions may be exempt
as an organization described in section 501(c)(19) if the requirements of paragraphs (b) and
(c) of this section are met and if no part of its net earnings inures to the benefit of any private
shareholder or individual. Paragraph (b) of this section contains the
membership requirements such a post or organization must meet in order to qualify
under section 501(c)(19). Paragraph (c) of this section outlines the purposes, at least one of
which such a post or organization must have to so qualify.

(2) In addition, an auxiliary unit or society described in paragraph (d) of this section of such a
veterans post, or organization and a trust or foundation described in paragraph (e) of this
section for such post or organization may be exempt as an organization described in
section 501(c)(19).

(b) Membership requirements. (1) In order to be described in section 501(c)(19) under
paragraph (a)(1) of this section, an organization must meet the membership requirements of
section 501(c)(19)(B) and this paragraph. There are two requirements that must be met under
this paragraph. The first requirement is that at least 75 percent of the members of the
organization must be war veterans. For purposes of this section the term war veterans mean
persons, whether present members of the United States Armed Forces, who have served in
the Armed Forces of the United States during a period of war (including the Korean and
Vietnam conflicts).

(2) The second requirement of this paragraph is that at least 97.5 percent of all members of the
organization must be described in one or more of the following categories:

(i) War veterans,
(ii) Present or former members of the United States Armed Forces,

(iii) Cadets (including only students in college or university ROTC programs or at Armed Services
academies), or

(iv) Spouses, widows, or widowers of individuals referred to in paragraph (b)(2)(i), (ii) or (iii) of this
section.

(c) Exempt purposes. In addition to the requirements of paragraphs (a)(1) and (b) of this section,
in order to be described in section 501(c)(19) under paragraph (a)(1) of this section an
organization must be operated exclusively for one or more of the following purposes:

(1) To promote the social welfare of the community as defined in § 1.501(c)(4)-1(a)(2).

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

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

(d) Auxiliary units or societies for war veterans' organizations. A unit or society may be exempt as
an organization described in section 501(c)(19) and paragraph (a)(2) of this section if it is an
auxiliary unit or society of a post or organization of war veterans described in paragraph (a)(1) of
this section. A unit or society is an auxiliary unit or society or such a post or organization if it meets
the following requirements:

(1) It is affiliated with, and organized in accordance with, the bylaws and regulations formulated by
an organization described in paragraph (a)(1) of this section,

(2) At least 75 percent of its members are either war veterans, or spouses of war veterans, or are
related to a war veteran within two degrees of consanguinity (i.e., grandparent, brother, sister,
grandchild, represent the most distant allowable relationships),

(3) All of its members are either members of an organization described in paragraph (a)(1) of this
section, or spouses of a member of such an organization or are related to a member of such an
organization, within two degrees of, consanguinity, and

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

(e) Trusts or foundations. A trust or foundation may be exempt as an organization described in
section 501(c)(19) and paragraph (a)(2) of this section if it is a trust or foundation for a post or
organization of war veterans described in paragraph (a)(1) of this section. A trust or foundation is
a trust or foundation for such a post or organization if it meets the following requirements:

(1) The trust or foundation is in existence under local law and, if organized for charitable purposes,
has a dissolution provision described in § 1.501(c)(3)-1(b)(4).

(2) The corpus or income cannot be diverted or used other than for the funding of a post or
organization of war veterans described in paragraph (a)(1) of this section, for section 170(c)(4)
purposes, or as an insurance set aside (as defined in § 1.512(a)-4(b)).

(3) The trust income is not unreasonably accumulated and, if the trust or foundation is not an
insurance set aside, a substantial portion of the income is in fact distributed to such post or
organization or for section 170(c)(4) charitable purposes, and

(4) It is organized exclusively for one or more of those purposes enumerated in paragraph (c) of
this section.

TAXPAYER'S POSITION

is an auxiliary youth organization the runs a community baseball team .
Vice President, , agreed via a telephone conversation with IRS on dates
7/5/20XX and 7/29/20XX that their auxiliary organization would not meet membership
requirements under IRC section 501(c)(19) and is not an organization of cadets.
stated during this telephone conversation, their organization's activities are conducting the
operational activities of youth baseball team and he is the General Manager and Head Coach of
the team .

The are comprised of high school players from , , and and play the
months of June and July in a Statewide league with teams from , , ,
, (0 teams), , and . The schedule involves extensive
travel, meals, equipment, fees, and many more related expenses. states the 20XX season
cost the Program $0 per player, and the Form 990 return for tax year end 12/31/20XX reports the
season Program cost based is $0 ($0 / 0 players) per player.

stated he is working with an attorney and CPA (maybe without charge) to see if they can
apply Form 1023 for tax exemption under IRC section 501(c)(3).

GOVERNMENT'S POSITION

has agreed and does not dispute that their auxiliary youth organization does not meet the
membership requirements under 26 U.S.C.A. § 501, I.R.C. § 501(a)(c)(19) as described below:

A. A post or organization of past or present members of the Armed Forces of the United
States, or an auxiliary unit or society of, or a trust or foundation for, any such post or
organization--organized in the United States or any of its possessions,

B. at least 75 percent of the members of which are past or present members of the Armed
Forces of the United States and substantially all the other members of which 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 United States or of
cadets. and

C. no part of the net earnings of which inures to the benefit of any private shareholder or
individual.

Nor does disagree it does not meet membership requirements as described in 26 C.F.R. §
1.501(c)(19)-1, Treas. Reg. (d) Auxiliary units or societies for war veterans' organizations. A unit
or society may be exempt as an organization described in section 501(c)(19) and paragraph (a)(2)
of this section if it is an auxiliary unit or society of a post or organization of war veterans described
in paragraph (a)(1) of this section. A unit or society is an auxiliary unit or society or such a post or
organization if it meets the following requirements:

(1) It is affiliated with, and organized in accordance with, the bylaws and regulations formulated by
an organization described in paragraph (a)(1) of this section,

(2) At least 75 percent of its members are either war veterans, or spouses of war veterans, or are
related to a war veteran within two degrees of consanguinity (i.e., grandparent, brother, sister,
grandchild, represent the most distant allowable relationships),

(3) All of its members are either members of an organization described in paragraph (a)(1) of this
section, or spouses of a member of such an organization or are related to a member of such an
organization, within two degrees of consanguinity, and

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

is not a Post. tax-exempt status is reported as an IRC section 501(c)(19)
auxiliary unit under the group ruling of the central organization. (See
Conclusion below for central organization's full name and address.) Internal Revenue Service
("IRS") reports central organization's ruling date is March,19XX and formation date with
state authorities is 9/15/20XX. is sponsored by an exempt post, , an
nonprofit corporation formed on January 27, 19XX.

has its own EIN and formed for the purpose to provide financial and logistical support for
the and if funding available provide additional youth
sports and scholarships.

operational activities are to run the baseball team. reports the baseball team
participants (or/on about 0 players) are under the age of eighteen and from , and
. The team plays in the months of June and July in a Statewide league with teams from
, , , , (0 teams), , and . The
schedule involves extensive travel, meals, equipment, fees, and many more related expenses.
states the 20XX season cost the Program $0 per player, and the Form 990 return reports the
20XX season Program cost $0 ($0 / 0 players) per player.

does conduct gaming activities with the intent hopefully to provide income for the operation
of the team other than funding. uses the gaming permit secured by the local
post issued by the Gaming revenues have not been enough,
therefore requires additional funding from sponsorships, players fees, etc.

IRS agrees with Vice President, , that their auxiliary organization does not meet
the membership requirements under IRC section 501(c)(19) and is not an organization of cadets.

If does not meet the membership requirements for an auxiliary unit and is not an
organization of cadets as described under IRC section 501(c)(19), should be removed from
the group exemption of central organization.

Youth units may qualify for exemption under other sections of the Code by filing either an
Application Form 1023 or Form 1024 with the Internal Revenue Service.

CONCLUSION

If does not meet the membership requirements for an auxiliary unit, it cannot qualify for
exemption under IRC 501(c)(19) unless it is an organization of cadets. is not an
organization of cadets. Because cannot meet the membership requirements for exemption
under IRC section 501(c)(19) and it is not an organization of cadets therefore revocation of
exemption under IRC section 501(c)(19) needs to occur and the organization must be removed
from the group exemption of central organization, The

Accordingly, the organization's exempt status will be revoked date of corporation's formation
date with an effective of January 1, 20XX, 1st day in tax year end 20XX.

Form 1120 returns should be filed for the tax periods from December 31, 20XX and thereafter.