IRS denies 501(c)(3) status to a fraternal lodge whose main purpose is its own ritual activities

Plain-English summary

A fraternal lodge applied for 501(c)(3) charity status using the short Form 1023-EZ, then had to answer follow-up questions. The IRS denied the application on both of the two tests every charity must meet. On the organizational test, the group is an unincorporated association whose organizing document says nothing about limiting its purposes to charitable ones and has no clause dedicating its assets to another charity if it dissolves, so its paperwork does not meet the requirement. On the operational test, the lodge's primary activity is fraternal: holding regular meetings to discuss the history, symbols, and rituals of its order, with membership open to anyone who wants to join and be "raised" in its values. It does run some charitable outreach (food drives and volunteering at a food kitchen), but it gave no evidence that this charitable work is substantial compared with its fraternal activities. Under the Better Business Bureau rule, a single substantial non-exempt purpose defeats exemption, and here the fraternal purpose is substantial. Because the group did not protest the proposed denial within 30 days, the denial became final. Contributions are not deductible under IRC § 170, and the group must file federal income tax returns.

Ruling snapshot

• Question: Does a fraternal lodge whose primary activity is conducting its own ritual/fraternal meetings qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (fails both the organizational and operational tests; substantial non-exempt fraternal purpose)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1)(i), (b)(4), (c)(1), (d)(2); Rev. Proc. 2022-5; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Date: 06/23/2022

IRS Box 2508
Cincinnati, OH 45201

Employer ID number:

Form you must file:
1120
Tax years:
All

Person to contact:

Release Number: 202237019
Release Date: 9/16/2022
UIL Code: 501.00-00, 501.03-00, 501.03-05, 501.03-30

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.

Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: 04/18/2022

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend:
W = Adjective
X = State
Y = Date (SIC)
Z = Date

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ Streamline Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code.

You attested on Form 1023-EZ that you are organized and operated exclusively to further charitable purposes.
You also attested that you have not conducted and will not conduct prohibited activities under IRC Section 501
(c)(3).

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.

You were formed as an unincorporated association operating in the State of X. Your organizing document
indicates it was adopted on Y. Your application, Form 1023-EZ, indicates you were formed on Z. The
document is silent on the purposes for which you are organized and there are no provisions for the disposition
of assets upon dissolution.

You are formed as a lodge for fraternal activities in the enlightenment of W values. Membership is open to
anyone wishing to be accepted and raised to the meaning of W membership. You hold regular meetings where
the history and symbols of the W rituals are discussed. Members pay dues assessed annually. All your time is
spent on W activities. This includes an outreach program in the form of food drives and volunteering at the local
food kitchen.

All your revenue is from membership dues. Your expenses are mostly for overhead related to your lodge and
some other miscellaneous costs including lodge dues to your parent lodge, and printing expenses

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation (Treas. Reg.) Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an
organization described in IRC Section 501(c)(3), an organization must be both organized and operated
exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the
organizational test or the operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) states that an organization is organized exclusively for one or more
exempt purposes only if its organizational document:

(a) Limits the purposes of such organization to one or more exempt purposes; and

(b) Does not expressly empower the organization to engage, otherwise than as an insubstantial part of
its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization's articles or operation of law, be distributed for one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively
for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of
such exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare.

Revenue Procedure 2022-5, 2022-1 I.R.B. 250, Section 3 states that a determination letter or ruling on exempt
status is issued based solely upon the facts and representations contained in the administrative record. The
applicant is responsible for the accuracy of any factual representations or attestations contained in the
application. Section 6 (and its predecessors) provides that a favorable determination letter or ruling will be
issued to an organization only if its application and supporting documents establish that it meets the particular
requirements of the section under which exemption from federal income tax is claimed.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption under IRC Section 501(c)(3) regardless of the number or importance of truly exempt purposes.

Application of law

A ruling on exempt status is based solely on facts and representations in the administrative file. You did not
provide sufficient facts in your application and the additional information you provided did not establish that
you are entitled to exempt status. Therefore, there is not sufficient documentation to establish that you meet the
requirements of IRC Section 501(c)(3) as required by Revenue Procedure 2022-5.

IRC Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
IRC Section 501(c)(3).

Because your organizing document does not have a purpose clause that limits your purposes to those described
in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i), you fail the organizational test under IRC Section 501(c)(3).

You also have no provision in your organizing document that permanently dedicates your assets upon
dissolution to purposes described in IRC Section 501(c)(3) as required by Treas. Reg. Section 1.501(c)(3)-
1(b)(4) which also causes you to fail the organizational test.

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You indicate that you have
outreach programs but failed to provide details on how you operate exclusively for charitable purposes. There is
no evidence of your outreach programs being substantial in nature. Thus, as provided in Treas. Reg. Section
1.501(c)(3)-1(d)(2), you have not established that your operations accomplish exclusively charitable purposes.

You describe yourself as a lodge that focuses on W activities. You have not demonstrated how W activities
further an exempt purpose. Although you indicate that some of W activities include charitable endeavors, there
is no evidence that your primary purpose is charitable. Thus, the substantial purpose of providing W activities
precludes your claim of exemption.

Conclusion

Based on the facts and law specified above, you do not meet the organizational or operational test required for
exemption under IRC Section 501(c)(3). Further, you have not demonstrated how your operations are in
furtherance of any exempt purpose. Thus, you are not organized and operated exclusively for exempt purpose
and cannot be recognized for exemption under Section 501(c)(3). Donations to you are not deductible to the
donor.

If you agree

If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree

You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference
• The signature of an officer, director, trustee, or other official who is authorized to sign for the
  organization or your authorized representative
• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven't given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get 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 listed at
the top of this letter.

Contacting the Taxpayer Advocate Service
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 if 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K