IRS revokes exemption of a property-holding fraternal organization

Plain-English summary

An organization recognized under IRC § 501(c)(10) held property and investment assets associated with another membership organization. It had only two officers or board members, no separate membership, no parent organization, and no rites, rituals, ceremonies, or other fraternal activities of its own. The IRS also found that the organization did not operate under a lodge system and did not devote all net earnings exclusively to charitable or fraternal purposes, because its disbursements largely covered overhead apart from one donation. Revenue Ruling 81-117 supported the conclusion that serving members of related fraternal organizations does not substitute for conducting fraternal activities and operating under a lodge system. The IRS revoked exemption effective January 1 of the redacted year, and the organization consented to the proposed action.

Ruling snapshot

• Question: Did the organization continue to qualify as a domestic fraternal organization under IRC § 501(c)(10)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(8) and 501(c)(10); Treas. Reg. § 1.501(c)(10)-1; Rev. Rul. 81-117

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
Attn: Mandatory Review, MC 4920 DAL
TAX EXEMPT AND 1100 Commerce St.
GOVERNMENT ENTITIES Dallas, TX 75242

DIVISION
Date: February 9, 2016

Number: 201620014
Release Date: 5/13/2016 Employer Identification Number:

Person to Contact/ID Number:
Contact Numbers:

UIL Code: 501.10-00

Dear

In a determination letter dated November 19XX, you were held to be exempt
from Federal income tax under section 501(c)(10) of the Internal Revenue
Code (the Code).

Based on recent information received, we have determined you have not
operated in accordance with the provisions of section 501(c)(10) of the Code.
Accordingly, your exemption from Federal income tax is revoked effective
January 1, 20XX. This is a final adverse determination letter with regard to
your status under section 501(c)(10) of the Code.

We previously provided you a report of examination explaining why we believe
revocation of your exempt status is necessary. At that time, we informed you
of your right to contact the Taxpayer Advocate, as well as your appeal rights.
On November 6, 20XX you signed Form 6018-A, Consent to Proposed Action,
agreeing to the revocation of your exempt status under section 501(c)(10) of
the Code.

You are required to file Form 1120 U. S. Corporation Income Tax Return for year
ending December 31, 20XX with the Ogden Service Center. In addition, for future
periods, you are required to file Form 1120 with the appropriate service center
indicated in the instructions for the return.

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
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 at the beginning of this letter.

Thank you for your cooperation.

Sincerely,

Paul A. Marmolejo
Acting Director, EO Examinations


Department of the Treasury

Internal Revenue Service

Tax Exempt and Government Entities Division
Exempt Organizations: Examinations

1100 Commerce Street MC4900DAL

Dallas, TX 75242-1100

Date: October 15, 2015

Taxpayer identification number:
Form:

Tax year(s) ended:
Person to contact/ID number:
Contact numbers:

Manager’s name/ID number:

Manager’s contact number:

Response due date:

Certified Mail — Return Receipt Requested
Dear

Why you are receiving this letter
Enclosed is a copy of our report of examination explaining why revocation of your organization's
tax-exempt status is necessary.

What you need to do if you agree

If you agree with our findings, please sign the enclosed Form 6018-A, Consent to Proposed
Action, and return it to the contact at the address listed above. We'll send you a final letter
revoking your exempt status.

If we don’t hear from you

If we don’t hear from you within 30 calendar days from the date of this letter, we'll process your
case based on the recommendations shown in the report of examination and this letter will
become final.

Effects of revocation

Letter 3610-R (10-2012)
Catalog Number 59432G


In the event of revocation, you'll be required to file federal income tax returns for the tax year(s)
shown above. File these returns with the contact at the address listed above within 30 calendar
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.

What you need to do if you disagree with our findings

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

If you and Appeals don’t agree on some or all of the issues after your Appeals conference, or if
you don't 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.

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

892. Please contact the person identified in the heading of this letter if you’re considering
requesting technical advice. If we send a determination letter to you based on a technical advice
memorandum issued by the Exempt Organizations Rulings and Agreements office, then 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 Service (TAS). TAS is your
voice at the IRS. This service helps taxpayers whose problems with the IRS are causing
financial difficulties; who have tried but haven’t been able to resolve their problems with
the IRS; and those who believe an IRS system or procedure is not working as it should. If
you believe you are eligible for TAS assistance, you can call the toll-free number 1-877-
777-4778 or TTY/TDD 1-800-829-4059. For more information, go to www.irs.gov/advocate.
If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

If you have any questions, please call the contact 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.

2 Letter 3610-R (10-2012)
Catalog Number 59432G


Thank you for your cooperation.

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018-A
Publication 892
Publication 3498

3 Letter 3610-R (10-2012)
Catalog Number 59432G


Schedule number or exhibit

Form 886-A

Name of taxpayer Tax Identification Number Year/Period ended
20XX
Issue:
Whether (hereinafter referred to as Organization) continues to qualify for

exemption as an organization described within Internal Code Section 501(c)(10) given it does not
operate for fraternal purposes, is not operated under the lodge system and does not devote its
entire net earnings to exclusively charitable or fraternal purposes.

Facts:
The received exemption November 19XX as a fraternal organization described in

501(c)(10) of the Code. According to its Charter of Incorporation, the organization was formed for
the purpose of:

It also states that “

The is a membership organization comprised of two officers/board members. The
Organization holds title to the property and handles the day to day operations of the facility on
, ultimately insuring the building is usable by the

. ( ). All social functions that take place at the facility
are run by the . The Organization does not participate or organize these
functions. According to the organizations financial documents provided during the audit the
Organization is not performing any exempt activities. The organization does not devote all of its
earnings to certain specified purpose (essentially religious, charitable, educational, scientific,
literary, or fraternal purposes). The Organizations membership is comprised of members that are

members of the . The Organization does not have its own separate
membership from the . The membership is one in the same.
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

The main source of income for the Organization is investment income. The Organization as of
December 31, 20XX has $ in a Investment
account. The Organization receives no income from members. The Organization does not have
a “parent” organization and retains earnings and income from year to year.

Based on the organizing documents provided the organization was unable to show that they are
under a parent or have rules governed by a parent organization.

During the onsite visit with the Organization an initial interview was held where the history and

activities were discussed. According to , Treasurer and
, Board of Director member the Organization was created in order to

prevent assets accumulated by the from being taken by other third
parties.

An affidavit received September 22, 20XX states that “while the is an affiliate of

, the is a separate entity formed many years
ago by members of the in order to prevent assets accumulated by the
from being raided and taken by the or other third party entities. The assets, including
the deposit accounts of are dedicated by its members to support the
which primarily treat ; and the makes both direct
contributions/donations to the and further donations to the through
the . The suffered the loss of part of its building from a
fire occurring in June 20XX; and the damages from such fire have been mitigated so that the
intends to resume producing income from rental of such building.”

According to the Organizations disbursement journal as illustrated below the net earnings are not
exclusively devoted to charitable or fraternal purposes. Based on the disbursement journal the
Organization made a $ donation to the and all other expenses are for
overhead. There is no indication that the net earnings are exclusively devoted to charitable or
fraternal purposes.

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

Law:

Section 501(c)(10) of the Code exempts from federal income tax domestic fraternal societies,
orders, or associations, operating under the lodge system. The net earnings of which are devoted
exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and
which do not provide for the payment of life, sick, accident, or other benefits.

Treasury Regulation § 1.501(c)(10)—1 of the regulations explain that certain fraternal beneficiary
societies, for taxable years beginning after December 31, 1969, an organization will qualify for
exemption under section 501(c)(10) if it:

(1) Is a domestic fraternal beneficiary society order, or association, described in section 501(c)(8)
and the regulations thereunder except that it does not provide for the payment of life, sick,
accident, or other benefits to its members, and

(2) Devotes its net earnings exclusively to religious, charitable, scientific, literary, educational, and
fraternal purposes.

“Fraternal” means a common tie or goal. A common tie required more than just engaging in social
activities. Even if members of an organization enjoy a common tie or goal, the organization does
not serve a fraternal purpose unless its members engage in fraternal activities. Fraternal activities
and benefits must be primary.

Form 886-A (1-1994) Catalog Number 20810W Page 3 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

One of the requirements for tax exempt status for a fraternal organization is “operating under the
lodge system.” This means carrying on activities under a form of organization that is comprised of
local branches chartered and generally supervised by a parent organization but are largely self-
governing. The local branches, called lodges, councils or chapters, must be separately organized
and self-governing but operated under the general control and supervision of the parent lodge and
subject to its rules, laws and edicts.

The member of a fraternal society must have a common fraternal bond. In order to have a
common fraternal bond; the members must have adopted the same or very similar calling,
avocation, profession, or be working in unison to accomplish some worth objective or common
cause.

Revenue Ruling 81-117, 1981-1 C.B. 346 states An organization that does not conduct any
fraternal activities or operate under the lodge system, but does operate exclusively for the benefit
of members of certain related domestic fraternal societies operating under the lodge system, does
not qualify for exemption under section 501(c)(10) of the Code.

The reference in section 1.501(c)(10)-1(a) of the regulations to the description of fraternal
beneficiary societies, found in section 501(c)(8) of the Code and the regulations thereunder, is
directed at the fraternal and lodge system characteristics which organizations described in
sections 501(c)(8) and 501(c)(10) have in common. The reference does not incorporate the
subcategory of organizations which operate “for the exclusive benefit of the members of a
fraternity itself operating under the lodge system’ in its definition of a domestic fraternal
organization under section 501(c)(10). Since that subcategory was added to a predecessor of
section 501(c)(8) to cover the separately organized insurance branches of the fraternal beneficiary
societies, it does not apply to section 501(c)(10) organizations which cannot provide insurance or
other benefits to their members.

Furthermore, even though the subject organization is operating for the exclusive benefit of the
members of certain related fraternities themselves operating under the lodge system, it does not
operate under the lodge system or conduct any fraternal activities. An organization that does not
conduct any fraternal activities or operate under the lodge system, but does operate exclusively
for the benefit of the members of certain related domestic fraternal societies themselves operating
under the lodge system, does not qualify for exemption from federal income tax under section
501(c)(10) of the Code.

Taxpayer's Position:

The taxpayer's position has not been determined at this time.

Form 886-A (1-1994) Catalog Number 20810W Page 4 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

Government's Position:

The is not eligible for exemption under 501(c)(10) of the Code as a domestic
fraternal society, order, or association. Section 501(c)(10) of the Code exempts from federal
income tax domestic fraternal societies, orders, or associations, operating under the lodge system.
The net earnings of which are devoted exclusively to religious, charitable, scientific, literary,
educational, and fraternal purposes, and which do not provide for the payment of life, sick,
accident, or other benefits.

The Organization does not meet the requirements of an organization described in IRC section
501(c)(10). Members of the Organization do not have a common fraternal bond. The members do
not adopt the same of very similar calling, avocation, profession, or are working in unison to
accomplish any worthy objective or common cause. The Organization has not been operating for
religious, charitable, scientific, literary, educational and fraternal purposes, nor has the
Organization devoted its net earnings exclusively to religious, charitable, scientific, literary,
educational and fraternal purposes.

The purpose of the organization is “

The scope of their stated mission is outside the allowed for fraternal society, order or association
exempt under 501(c)(10) of the Code. As their organizing document does not meet the
organizational test required for exemption under 501(c)(10) of the Code, the Organization does
not qualify for exemption under this code section.

The term “fraternal” is used to describe an organization that is in the pursuit of a common object,
calling or profession. These types of endeavors usually have a tendency to create a brotherly
feeling among those who are thus engaged. The does not have any fraternal
activities. Rituals, ceremonies, and regalia are evidence of fraternal activities- you will not find any
of there with the . The Organization does not have any rites or rituals when the
meetings are held, or when new members are initiated. Also, the Organization does not have its
own membership. Instead it considers members as their members.

An organization is “operating under the lodge system’ if it operates under the general control and
supervision of a parent lodge, and is subject to the laws and edicts of the parent lodge. It is
generally understood that such an organization holds regular meetings at a designated place,
adopts a representative form of government, and performs its work according to a ritual.

Form 886-A (1-1994) Catalog Number 20810W Page 5 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

Revenue Ruling 81-117, 1981-1 C.B. 346 states An organization that does not conduct any
fraternal activities or operate under the lodge system, but does operate exclusively for the benefit
of members of certain related domestic fraternal societies operating under the lodge system, does
not qualify for exemption under section 501(c)(10) of the Code. does not conduct
any fraternal activities or operate under the lodge system.

Conclusion:

In the case of , it is not entitled to exemption from Federal income tax as an
organization described in section 501(c)(10) of the Code because:

1. You are not operated for fraternal purposes;
2. You are not operated under the lodge system;
3. You do not devote your entire net earnings to exclusively charitable or fraternal purposes.

Consequently, exemption from Federal income tax is being revoked starting
January 1, 20XX. Please file U.S. Corporation income tax return form 1120 for tax periods ending
December 31, 20XX, as well as, subsequent years.

Form 886-A (1-1994) Catalog Number 20810W Page 6 publish.no.irs.gov Department of the Treasury-Internal Revenue Service