Fraternal society lost exemption after failing to provide records

Plain-English summary

A fraternal beneficiary society had long been recognized as exempt under section 501(c)(8). During an examination, the IRS repeatedly requested records about the society's receipts, expenditures, activities, lodge-system operations, and member benefits. The organization did not respond to letters or telephone messages, including several certified letters that were signed for. Because it did not substantiate its exempt activities or comply with the recordkeeping and reporting duties in sections 6001 and 6033, the IRS revoked its exemption and required corporate income tax returns.

Ruling snapshot

• Question: Did the organization continue to qualify under section 501(c)(8) when it failed to respond to the examination or produce records?
• Outcome: revocation
• Key authorities: IRC §§ 501(a), 501(c)(8), 6001, 6033; Treas. Reg. §§ 1.501(c)(8)-1, 1.6001-1, and 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street

TAX EXEMPT AND Dallas, TX 75242
GOVERNMENT ENTITIES
DIVISION
Date: DEC 0 2 2016

Release Number: 201720011

Release Date: 5/19/2017 Taxpayer Identification Number:
UIL Code: 501.08-00

Tax Period:

December 31, 20XX

Person to Contact:

Employee Identification Number:

Employee Telephone Number:
Phone:
Fax:

Dear

This is a final determination that you do not qualify for exemption from Federal income tax under Internal Revenue
Code (the “Code”) section 501(a) as an organization described in Code section 501(c)(8) for the tax period(s) above.
Your determination letter dated in October 19XX is revoked.

Our adverse determination as to your exempt status was made for the following reason(s):

Organizations described in I.R.C. § 501(c)(8) and exempt under section 501(a) must be operated under the lodge
system, or for the exclusive benefit of the members so operating, and have established system for the payment to its
members or the dependents of life, sick, accident or other benefits. You have failed to produce documents or
otherwise establish that you are operated for these exempt purposes. Further, you failed to respond to repeated
reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts,
expenditures, or activities as required by I.R.C. § 6001, 6033(a)(1) and the regulations thereunder.

Organizations that are not exempt under 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
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

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

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect you
taxpayer rights. We 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 our assistance, which is always free, we 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 in the heading of
this letter.

Sincerely yours,

Mary A. Epps
Acting Director, EO Examinations

Enclosure: Publication 892

Department of the Treasury
Internal Revenue Service

IRS Tax Exempt and Government Entities Division
324 25th St RM6025 Mail Stop 1112

Ogden, UT 84401

Date:
March 25, 2016
Taxpayer Identification Number:

Form:
990-N

Tax year(s) ended:
December 31, 20XX

Person to contact/ ID number:

Contact numbers:
Phone Number:

Manager's name/ ID number:

Manager's contact number:

Response due date:
April 25, 20XX

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).

After we issue the final revocation letter, we'll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

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.

Letter 3618 (06-2012)
Catalog Number 34809F

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
may also 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

For additional information

Letter 3618 (06-2012)
Catalog Number 34809F

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,

Paul A. Marmolejo
Acting Director, Exempt Organizations Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (06-2012)
Catalog Number 34809F


Schedule number or exhibit
EXPLANATIONS OF ITEMS

Form 886-A
(Rev. January 1994)

Year/Period ended
December 31,
20XX

Name of taxpayer Tax Identification Number

Issue:

Should a 501(c)(8) exempt organization be revoked due to failure to respond and failure to
produce records?

Facts:

The organization has not provided the requested information for the examination of the Form
990 for the tax year ending December 31, 20XX. The organization received their approval
for tax exemption in December 19XX.

Exhibit A (below) provides a list of the Internal Revenue Service correspondence or phone
contact made to the organization requesting that it provide information pertaining to your
Form 990 for the years ending December 31,20XX, December 31,20XX, and December 31,
20XX.

Summary of Exhibit A

Contact Correspondence Date Certified Receipt
type sent/ Phone sent or Mail? Signed date or phone
contact called Y/N response
Letter Sent Letter 4894 5-9-XX N No Response
(compliance check)
for tax year 20XX
to
Phone Compliance check 6-14-XX Left messages to return
call tried to call call.
" " returned one of
not good these calls. He had the
numbers. Could phone number for a long
not find a good time and was not
number associated with the

- organization,
Letter Letter 3854 (follow 6-14-XX Y Signed PS3811 (6-23-XX)
up) to signed by
.No other
response
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-


Form 886-A Schedule number or exhibit
(Rev. January 1994} EXPLANATIONS OF ITEMS 1
Name of taxpayer Tax Identification Number | Year/Period ended
December 31,
20XX
Letter Letter EOCA 8300 4-3-XX N No response
(start examination)
to
Letter Letter 3854 No 7-30-XX Y Signed PS3811 (8-10-XX)
Response signed by
. No other
response
Phone 12-14-XX Left message
call and told him of coming
———— letter
Letter Follow up letter to 12-14-XX Y Signed PS3811 (12-29-
XX) signed by
. No other
response
Phone Left message
Call to return call
and told him of coming
letter
Phone 1-4-XX Left message
Call to return
call.
Phone 1-6-XX Received message from
Call . Called
back and left message
asked for clarification of
what we wanted
» Phone 2-8-XX Left message telling if no
Call ’ response in a week will
4 start revocation
Phone ==
Call . 2-17-XX Left message, no
response, will revocate
| the exemption of the
organization for no_
response

has failed to respond to the Internal
Revenue Service correspondence for information pertaining to the Form 990 for the tax
periods ending December 31, 20XX, December 31, 20XX, and December 31, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -2-


Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS 1

Tax Identification Number | Year/Period ended

December 31,
’ 20XX

Name of taxpayer

Law:

501(c)(8)
§501(c)(8) are organized fraternal beneficiary societies, orders, or associations --

501(c)(8)(A) operating under the lodge system or for the exclusive benefit of the members of
a fraternity itself operating under the lodge system, and

501(c)(8)(B) providing for the payment of life, sick, accident, or other benefits to the members
of such society, order, or association or their dependents.

§ Reg. 1.501(c)(8)-1 In order to be exempt under §501(c)(8) 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.

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the
collection thereof, shall keep adequate records as the Secretary of the Treasury or his
delegate may from time to time prescribe.

Treas. Reg.§ 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that every
organization exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511
on its unrelated business income must keep such permanent books or accounts or records,
including inventories, as are sufficient to establish the amount of gross income, deduction,
credits, or other matters required to be shown by such person in any return of such tax. Such
organization shall also keep such books and records as are required to substantiate the
information required by IRC § 6033.

Treas. Reg. § 1.6001-1(e) states that the books or records required by this section shall be
kept at all times available for inspection by authorized internal revenue officers or employees,
and shall be retained as long as the contents thereof may be material in the administration of
any internal revenue law.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization
exempt from tax under section 501 (a) shall file an annual return, stating specifically the items
of gross income, receipts and disbursements, and such other information for the purposes of
carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe,
and keep such records, render under oath such statements, make such other returns, and
comply with such rules and regulations as the Secretary may from time to time prescribe.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -3-

Form 886-A Schedule number or exhibit
(Rev. January 1994) ] EXPLANATIONS OF ITEMS ]
Name of taxpayer Tax Identification Number | Year/Period ended
December 31,
' 20XX

Treas. Reg § 1.6033-1(h)(2) provides that every organization which has established its right
to exemption from tax, whether or not it is required to file an annual return of information, shall
submit such additional information as may be required by the district director for the purpose
of enabling him to inquire further into its exempt status and to administer the provisions of
subchapter F (section 501 and the following), chapter 1 of the Code and IRC § 6033.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to
produce a financial statement and statement of its operations for a certain year. However, its
records were so incomplete that the organization was unable to furnish such statements. The
Service held that the failure or inability to file the required information return or otherwise to
comply with the provisions of IRC § 6033 and the regulations which implement it, may result in
the termination of the exempt status of an organization previously held exempt, on the
grounds that the organization has not established that it is observing the conditions required
for the continuation of exempt status.

Organization's Position:

Several attempts to contact the organization have been made by either letters or phone calls.
The organization has not responded to any attempts by either mail or phone

Government's Position:

In accordance with the above cited provisions of the Code and regulations under

IRC §§ 6001 and 6033, organizations recognized as exempt from federal income tax must
meet certain reporting requirements. These requirements relate to the filing of a complete
and accurate annual information return (and other required federal tax forms) and the
retention of records sufficient to determine whether such entity is operated for the purposes
for which it was granted tax-exempt status and to determine its liability for any

unrelated business income tax.

Several attempts have been made to contact the organization starting in May of 20XX. The
organization has never responded to any phone call or Information Request Document.
Three of the letters were sent by certified mail and the certification was signed and returned.
Several phone calls and voice messages have not resulted in any information being
provided. Using the rationale that was developed in Revenue Ruling 59-95, the

Organization's failure to provide requested information should result in the termination of exempt

status.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -4-

4 '

Form 886-A Schedule number or exhibit
(Rev. January 1994} EXPLANATIONS OF ITEMS |
Name of taxpayer Tax Identification Number | Year/Period ended
December 31.
20XX
Conclusion:

It is the IRS's position that the organization failed to meet the reporting requirements under
IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under

IRC § 501(c)(8). Furthermore, the organization has failed to establish that it continues to
qualify for tax exempt status. Accordingly, the organization's exempt status is revoked
effective January 1, 20XX.

Form(s) 1120, U.S. Corporation Income Tax Return should be filed for the tax periods
ending on or after December 31, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -5-