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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 17. Fraternal Beneficiary Societies exempt under Sections IRC 501(c)(8) and IRC 501(c)(10)

4.76.17  Fraternal Beneficiary Societies exempt under Sections IRC 501(c)(8) and IRC 501(c)(10)

4.76.17.1  (03-01-2003)
Introduction

  1. This IRM section contains specific examination guidelines for an organization recognized as exempt from income tax under IRC section 501(a) as an organization described in IRC sections 501(c)(8) and 501(c)(10), hereinafter referred to as IRC 501(c)(8) and IRC 501(c)(10) organizations.

  2. It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of IRC 501(c)(8) and IRC 501(c)(10) organizations.

  3. This IRM section does not contain detailed technical information regarding sections 501(c)(8) or 501(c)(10) organizations. The examiner should review the technical information contained in IRM 7.25.8.

4.76.17.2  (03-01-2003)
Background Information

  1. An organization is described in IRC section 501(c)(8) if it is a fraternal beneficiary society, order or association operated under the lodge system or for the exclusive benefit of the members of a fraternal beneficiary society, order or association operating under the lodge system which provides for the payment of life, sick, accident, or other benefits to the members of such society, order or association or their dependents.

  2. An organization is described in IRC section 501(c)(10) if it is a domestic fraternal society, order, or association, operating under the lodge system which does not provide for the payment of life, sick, accident, or other benefits, and devotes it net earnings to religious, charitable, scientific, literary, educational, and fraternal purposes.

4.76.17.2.1  (03-01-2003)
Organizational Requirements

  1. The requirements for exemption under IRC section 501(c)(8) and IRC section 501(c)(10) are substantially the same except as follows:

    1. 501(c)(10) organizations can not provide life, sick, accident or other benefits to members.

    2. An IRC 501(c)(10) organization must be a domestic organization. A domestic organization is a corporation, order, association or society organized and operated in the United States. This restriction is not imposed on an IRC 501(c)(8) organization.

    3. An organization which is not operated under the lodge system can qualify for exemption under IRC section 501(c)(8), if it is operated for the exclusive benefit of other IRC 501(c)(8) organizations which are operated under the lodge system.

    4. IRC section 501(c)(10), unlike IRC section 501(c)(8) organizations, must be operated for religious, charitable, scientific, literary, educational and fraternal purposes.These are generally the same purposes as those traditionally pursued by IRC 501(c)(8) fraternal beneficiary societies. Therefore, even though there is a difference in the wording of the statute, the examination guidelines pertaining to the purposes and activities of IRC 501(c)(8) and IRC 501(c)(10) organizations are combined in this IRM.

4.76.17.3  (03-01-2003)
Operating Under A Lodge System

  1. IRC 501(c)(8) and IRC 501(c)(10) organizations must be operating under a lodge system. A lodge system is comprised of local branches, chartered and generally supervised by a parent organization but are largely self governing. Local branches may be lodges, councils, or chapters. In this IRM all local branches are referred to as subordinate lodges.

  2. Both the parent and the subordinate lodges must be active.

4.76.17.3.1  (03-01-2003)
Examination Guidelines - Operating Under A Lodge System

  1. Review the organizing documents of the parent organization to determine whether it has rules governing subordinate lodges.

  2. Inspect the charter of the subordinate lodge to verify it is recognized as a subordinate lodge by the parent organization.

  3. Review the minutes, correspondence files, and reports submitted to the parent organization by its subordinate lodges or in the case of an examination of a parent organization, reports received from the subordinate lodges to verify the existence of an active parent and subordinate lodges.

    Note:

    If the subordinate lodges are not required to submit activity and financial reports to the parent organization, this may indicate the parent organization and subordinate lodges are not operating under the lodge system. If the parent organization and the subordinate lodges are not operated under the lodge system, neither the parent organization nor the subordinate lodges qualify for exemption as IRC 501(c)(8) or IRC 501(c)(10) organizations.

4.76.17.4  (03-01-2003)
Membership and Fraternal Activities

  1. The membership requirements and activities of a fraternal society are interrelated and therefore, the examination guidelines are being addressed concurrently.

  2. The members 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 worthy objective or common cause.

4.76.17.4.1  (03-01-2003)
Examination Guidelines - Membership and Fraternal Activities

  1. Review the organizing documents of the parent organization and the subordinate lodge to identify the common fraternal bond.

  2. Review membership records to determine whether the membership is comprised primarily of individuals sharing the common bond.

  3. Analyze the membership records and the initiation and dues ledger accounts to determine if there is more than one class of members. If there is more than one class of members, establish the reasons for the creation of different classes and determine whether the reasons for creating different classes are germane to the organization's exempt purposes.

  4. Review the minutes, correspondence, newsletters, flyers, advertisements, activity calendars, reservation book and house rules to identify the types and purposes of the organization's activities. If the activities are not fraternal or directed toward a common objective or cause, the organization may not qualify for exemption under IRC section 501(c)(8) or IRC section 501(c)(10).

    Note:

    Fraternal activities include social activities. Social activities tend to promote a brotherly feeling among those who are thus engaged. The promotion of a brotherly feeling is a fraternal purpose. The basic difference between IRC 501(c)(8) organizations and IRC 501(c)(7) organizations is that IRC 501(c)(7) organizations are not operated under a lodge system. An IRC 501(c)(8) organization may also conduct social activities but it must provide benefits to members which is not permissible under either IRC section 501(c)(7) or IRC section 501(c)(10).

4.76.17.5  (03-01-2003)
Payment of Benefits By IRC 501(c)(8) Organizations

  1. An IRC section 501(c)(8) fraternal organization must provide for the payment of life, sick, accident, or other benefits to members or their dependents.

  2. There is no requirement that benefits be provided to all members.

4.76.17.5.1  (03-01-2003)
Examination Guidelines - Payment of Benefits By IRC 501(c)(8) Organizations

  1. Review the organizing documents, contracts, publications and disbursement records to determine:

    1. The type of benefits provided,

    2. Eligibility requirements for the benefits,

    3. The existence of non-beneficial membership classes,

    4. The purpose of any non-beneficial membership classes, and

    5. The ratio of beneficial members to non-beneficial members.

  2. Not all types of benefits may be provided to members. If benefits not similar to life, sick or accident benefits are provided to members, the examiner should review IRM 7.25.8 and conduct in-depth research to determine the Service's current position on "other" benefits. If the benefits provided involve insuring members against property loss, the development of the case should be coordinated with Rulings and Agreements, EO Technical.

  3. If the number of non-beneficial members is substantial when compared to the beneficial members, the organization may not qualify for exemption as an organization described in IRC 501(c)(8) . See Polish Army Veterans Post 147 v. Commissioner 24 T.C. 891 (1955) where the court ruled when only 10 per cent of the members were qualified to receive benefits, this was not sufficient to qualify the organization as a " beneficiary" society.

4.76.17.6  (03-01-2003)
Exemption Issues

  1. If an IRC 501(c)(8) organization does not continue to qualify for exemption solely because it does not provide benefits to its members, consideration should be given to modifying its exempt status to IRC section 501(c)(10).

  2. If an IRC 501(c)(10) organization does not continue to qualify for exemption, solely because it provides benefits to its members, consideration should be given to modifying its exemption to IRC section 501(c)(8).

    Note:

    A subordinate lodge does not have to be exempt as an organization described in the same IRC section as the parent organization. For example, a subordinate lodge can qualify for exemption as an organization described in IRC section 501(c)(10) if it is chartered and generally supervised by a IRC 501(c)(8) parent organization.

  3. If an IRC 501(c)(8) organization does not continue to qualify for exemption because it does not provide benefits to its members and it is not operated under the lodge system, consideration should be given to modifying its exemption to IRC section 501(c)(4) or IRC section 501(c)(7).

  4. If an IRC 501(c)(10) organization does not continue to qualify for exemption solely because it does not operate under the lodge system, consideration should be given to modifying its exemption to IRC section 501(c)(4) or IRC section 501(c)(7).

    Note:

    Frequently, subordinate lodges are exempt under a group ruling issued to the parent organization. If the exempt status of a subordinate lodge covered by a group ruling is modified, a Form 1024, Application for Recognition of Exemption Under Section 501(a), must be obtained and an individual determination letter issued to the subordinate lodge. Also see IRM 4.75.24, Organizations Covered by a Group Ruling.

4.76.17.7  (03-01-2003)
Unrelated Business Income

  1. Frequently, fraternal organizations have unrelated business income from the following sources:

    1. Bar and restaurant sales to the general public,

    2. Rental income form debt financed property rented to non-member groups,

    3. Income from the rental of its facilities which include the provision of services such as food and beverage sales,

    4. Gaming activities open to the public, and

    5. Advertising in its publications.

  2. If the unrelated business activities are substantial, revocation of the fraternal organization's exempt status may be appropriate.

4.76.17.7.1  (03-01-2003)
Examination Guidelines - Unrelated Business Income

  1. During the initial interview, in addition to the general questions concerning the organization's sources of income and its books and records as detailed in IRM 4.75.11, On-Site Examination Guidelines, the examiner should ask detailed questions concerning:

    1. Rental of the organization's facilities to non-member groups,

    2. The use its facilities by non-member groups,

    3. Non-member participation in its social and gaming activities, and

    4. Advertising in its publications.

  2. If the fraternal organization conducts gaming activities, the examiner should follow the examination guidelines in IRM 4.76.50.

  3. If the fraternal organization's restaurant, bar or social activities are open to the non-members, the examiner should follow the examination guidelines in IRM 4.76.16, Social and Recreational Clubs - IRC 501(c)(7), to determine the amount of non-member use and the acceptable methods for allocating expenses to the non-member receipts.

    Note:

    Although most of the examination techniques for determining non-member receipts of an IRC section 501(c)(7) social club can be used to determine the non-member receipts of fraternal organizations, fraternal organizations are not subject to the specific record keeping requirements or percentage limitations of Rev. Proc. 71-17, 1971-1 C.B. 683, as modified by Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597).

4.76.17.8  (03-01-2003)
Employment Taxes and Information Returns

  1. The most frequently found employment tax issues raised in the examination of fraternal organizations involve wages paid to members who provide services to the fraternal organization on a part-time, irregular basis. Some of the more common services provided are:

    • Bartending

    • Maintainance

    • Bookkeeping

    • Facility improvements

    • Security

  2. Fraternal organizations frequently do not provide Forms 1099-MISC to bands and other entertainers who provide services at social events.

4.76.17.8.1  (03-01-2003)
Examination Guidelines - Employment Taxes and Information Returns

  1. During the initial interview, the examiner should ask the following questions:

    1. Who provides the various services necessary to operate and maintain the facilities? The question should specifically address each type of service that would be required such as managing the facilities, bartending, cooking and maintenance.

    2. Who keeps the books and records?

    3. Does the organization have live entertainment at its meetings and social functions?

    4. Does the organization pay for the services in cash or by check?

    5. If the payments are made in cash, how are they initially recorded?

    6. If the services are provided by volunteers are the volunteers reimbursed for expenses incurred?

    7. Are all of the payments reported on either Forms 940, 941, and W-2 or Forms 1099-MISC?

  2. Review the minutes, newsletters, flyers, advertisements, activity calendars, reservation books and contracts paying particular attention to special events requiring additional employees or involving independent contractors.

  3. Review the disbursements records for payments to individuals or for cash expenses.

4.76.17.9  (03-01-2003)
Related Entities

  1. Subordinate lodges frequently have the following types of related entities:

    1. Title Holding Companies;

    2. Auxiliaries, usually women's auxiliaries affiliated with a subordinate lodge;

    3. Corporations organized and operated to carry on the fraternal organization's social activities.

4.76.17.9.1  (03-01-2003)
Examination Guidelines - Related Entities

  1. During the initial contact with the fraternal organization, determine the existence of any related entities.

  2. Determine the exempt status of the related entities.

  3. Determine whether the related entities are required to file information or tax returns.

  4. Inspect copies of any returns filed by the related entities and determine whether they warrant examination. If the fraternal organization does not have copies of the related entity's return and the related entity is exempt, request a RICS return for inspection.

  5. When inspecting the return of a related title holding company exempt under IRC section 501(c)(2) be alert for social activities, food and beverage sales and similar activities being conducted by the title holding company rather than the fraternal organization. If these activities are being carried on by the title holding company the returns should be picked up for examination and revocation or modification considered.

  6. Most auxiliaries are separate entities exempt as organizations described in IRC section 501(c)(8) or IRC section 501(c)(10). In this case, the examiner should determine whether the women's auxiliary is fulfilling its filing requirements and inspect its information return. Occasionally an auxiliary is:

    1. Separately organized but is not exempt under IRC section 501(a) and is not filing the required tax returns. In this case, the examiner should secure the delinquent returns or assist the auxiliary in applying for exempt status;

    2. Not separately organized and is an integral part of the subordinate lodge but its receipts are not being included on the subordinate lodge's Form 990. In this case, the examiner should include the books and records of the auxiliary in the examination of the subordinate lodge.

4.76.17.10  (03-01-2003)
Separate Segregated Funds for Charitable Purposes

  1. IRC 170(c)(4) permits an individual to deduct a contribution or gift to a domestic fraternal organization if such contribution or gift is to be used exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals.

4.76.17.10.1  (03-01-2003)
Examination Guidelines-Separate Segregated Funds for Charitable Purposes

  1. Ask if the organization has a separate charitable fund during the initial contact with the organization.

  2. Review the organizational documents, minutes, correspondence, newsletters, flyers and receipts records to determine if contributions for charitable purposes are received.

  3. If the fraternal organization does receive charitable contributions, verify that the receipts are kept in a separate segregated fund and are disbursed only for charitable purposes.


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