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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 26. Veterans' Organizations

4.76.26  Veterans' Organizations

4.76.26.1  (07-01-2005)
Introduction

  1. This IRM section contains specific guidelines for the examination of Veterans' Organizations recognized as exempt from income tax under IRC 501(a) as organizations described in IRC 501(c)(19). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of such organizations.

  2. Although these guidelines provide specific assistance for the examination of IRC 501(c)(19) Veterans' Organizations, they are not all-inclusive. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC 501(c)(19) organizations. The examiner should review the technical information contained in IRM 7.25.19.

4.76.26.2  (07-01-2005)
Background Information

  1. IRC 501(c)(19) exempts from federal income tax 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.

  2. An organization composed of veterans of the United States Armed Forces may, if it meets the applicable requirements, also qualify for exemption under IRC 501(c)(3) as a charitable organization, IRC 501(c)(4) as a social welfare organization, IRC 501(c)(7) as a social club, or IRC 501(c)(8) or IRC 501(c)(10) as a fraternal organization.

  3. An organization that does not qualify under IRC 501(c)(19) because it cannot meet the membership percentages test is not precluded from qualifying under IRC 501(c)(4). An organization that cannot meet the membership percentages test of IRC 501(c)(19), but is primarily engaged in activities that promote social welfare, such as providing assistance to needy and disabled veterans and/or promoting patriotism, can qualify for exemption under IRC 501(c)(4).

  4. If the activities of a veterans' post primarily serve the interests of its members or constitute the operation of a business, the organization cannot qualify under IRC 501(c)(4). See Rev. Rul. 68-46, 1968-1 C.B. 260.

  5. A subsidiary of a veterans' organization, which operates a social facility on behalf of the organization, does not qualify under IRC 501(c)(4), but may qualify under IRC 501(c)(7). See Rev. Rul. 66-150, 1966-1 C.B. 147.

4.76.26.3  (07-01-2005)
Deductibility of Contributions

  1. Deductibility of contributions under IRC 170(c)(3) and IRC 2522(a)(4), to a veterans' organization that qualifies under IRC 501(c)(19), is not automatic. The veterans' organization must meet the "war veterans" membership requirements under IRC 170(c)(3) to receive deductible contributions.

4.76.26.4  (07-01-2005)
Membership Requirements

  1. To be recognized as tax exempt under IRC 501(c)(19), an organization must meet the following membership requirements, for taxable years ending on or before November 11, 2003:

    1. At least 75 percent of the organization's members are present or former members of the United States Armed Forces;

    2. Of the remaining 25 percent, at least 90 percent must be cadets who are students in a college or university R.O.T.C. program or at an Armed Services academy, or spouses, widows, or widowers of such persons; and

    3. Only 2.5 percent of the total membership may fall outside the above categories.

  2. Section 105 of the Military Family Tax Relief Act of 2003 modifies the membership requirements for veterans' organizations under IRC 501(c)(19). For taxable years beginning after November 11, 2003, an organization must meet the following membership requirements:

    1. At least 75 percent of the organization's members are present or former members of the United States Armed Forces (veterans);

    2. Of the remaining members, substantially all (90%) must be cadets who are students in a college or university R.O.T.C. program or at an Armed Services academy, or spouses, widows, widowers, ancestors, or lineal descendants of veterans or cadets; and

    3. No more than 2.5 percent of the total membership may consist of individuals who are not veterans, cadets, spouses, widows, widowers, ancestors, or lineal descendants of veterans or cadets.

      Example:

      An IRC 501(c)(19) organization consisting of 200 people must have at least 150 members who are past or present members of the Armed Forces of the United States (75% x 200) and cannot have more than 5 members (2 1/2% x 200) who are neither past or present members of the Armed Forces nor cadets, spouses, widows, widowers, ancestors, or lineal descendants of such persons.

4.76.26.4.1  (07-01-2005)
War Veterans Defined

  1. War veterans are defined as persons, whether or not present members of the United States Armed Forces, who have served in the Armed Forces of the United States during a period of war.

  2. Periods of war are generally considered to be the same as set forth in 38 U.S.C. section 101 concerning veterans' benefits. See Rev. Rul. 59-151, 1959-1 C.B. 53, and Rev. Rul. 78-239, 1978-1 C.B. 162. Such periods include:

    • The Spanish American War – April 21, 1898, through July 4, 1902;

    • The Philippine Insurrection, Boxer Rebellion; and the Moro Province Hostilities – April 21, 1898, through July 15, 1903;

    • World War I – April 6, 1917, through November 11, 1918. In the case of military forces who served in Russia, April 6, 1917, through April 1, 1920;

    • World War II – December 7, 1941, through December 31, 1946;

    • The Korean War – June 27, 1950, through January 31, 1955;

    • The Vietnam Era – February 28, 1961, through May 7, 1975; and

    • The Persian Gulf War – August 2, 1990, and ending on the date thereafter prescribed by Presidential Proclamation or by law.

  3. For purposes of the 90-percent test, war veterans may include members of expeditionary forces who actually served in combat situations in foreign countries between the periods of war as defined above.

4.76.26.4.2  (07-01-2005)
Examination Guidelines for Determining Membership

  1. Review the following to determine the composition of membership of the organization:

    1. Articles of Incorporation, bylaws, directors' meeting minutes, and general membership meeting minutes that contain membership requirements and categories;

    2. Membership applications, DD Forms 214, or other discharge documents;

    3. Membership cards and master member lists if they designate status as veteran, non-veteran, auxiliary, or other membership class; and

    4. The dues structure and the rights and responsibilities of the different categories of members, if applicable.

  2. The organization must maintain members' military service dates to establish that contributions to the organization are deductible.

  3. Ascertain whether the organization meets the membership requirements described in IRC 501(c)(19). If the organization does not meet the membership requirements, consider whether modification of exemption to IRC 501(c)(4) is appropriate.

  4. There may be an issue as to whether a specific membership category is composed of bona fide members or whether the members have privileges similar to the general public utilizing entertainment facilities and goods and services of the organization. Hence, it is very important to analyze the dues structure, rights, and responsibilities of membership.

  5. If the organization has no determinable dues-paying members, but engages in significant transactions with the general public, exemption may be jeopardized.

4.76.26.5  (07-01-2005)
Auxiliary Units for Veterans' Organizations

  1. An Auxiliary Unit or society of a post or veterans' organization exempt under IRC 501(c)(19) may also be exempt as an organization described in IRC 501(c)(19). It may be eligible for tax deductible contributions under IRC 170(c)(3) only if it satisfies the membership and purpose requirements set forth therein.

  2. Identify any Auxiliary Unit or society affiliated with the organization:

    1. Generally such organizations are organized in accordance with the bylaws and regulations formulated by an organization described in IRC 501(c)(19); and

    2. "Affiliated with" indicates an act or condition of being affiliated, allied, or associated with an IRC 501(c)(19) organization.

  3. Determine if the Auxiliary Unit is a function of the IRC 501(c)(19) organization, a separate organization recognized as exempt under IRC 501(c)(19), or a separate non-exempt organization.

  4. The Auxiliary Unit is a function of the veterans' organization if it does not have a separate organizing document, uses the veterans' organization's employer identification number (EIN) for its activities, and has the same membership rights.

  5. If the Auxiliary is not separately organized:

    1. Count the members of an Auxiliary Unit in determining the veterans' organization's compliance with the membership requirements under IRC 501(c)(19); and

    2. Determine if the purposes and activities of the Auxiliary support IRC 501(c)(19) purposes. (If the Auxiliary Unit is a youth activity, its activities are considered to be related to the organization's exempt purposes). If the exempt purposes are not related, the income from its activities may be unrelated business income and have an adverse impact on the veterans' organization's exempt status.

  6. If the Auxiliary is separately organized:

    1. Do not count the members in determining the veterans' organization's compliance with the membership requirements under IRC 501(c)(19); and

    2. Inspect the return of the Auxiliary organization to determine if an examination is warranted.

  7. Use of an IRC 501(c)(19) organization's facilities by an IRC 501(c)(19) Auxiliary Unit is considered a related activity.

4.76.26.6  (07-01-2005)
Member/Nonmember Recordkeeping Requirements

  1. Generally, income the organization receives from nonmembers for the purchase of goods or services or for the use of its facilities is considered unrelated business taxable income. For purposes of differentiating unrelated business income and income from exempt activities, an organization must maintain adequate records to distinguish between members and nonmembers who participate in its activities and to determine the amount of income received from each.

  2. IRC 6001 and Treas. Regs. section 1.6001-1(a) and (c) discuss recordkeeping requirements for exempt organizations. In addition, Publication 3386 provides recordkeeping requirements for Veterans' Organizations exempt under IRC 501(c)(19) and provides the following guidance in determining member and non-member participation:

    1. A guest, for IRC 501(c)(19) purposes, is an individual who is accompanied by a member who pays for goods or services provided to the guest without being reimbursed by the guest;

    2. A nonmember is a person from the general public, who pays the organization for recreational and social services provided;

    3. A paying nonmember is a purchaser of the goods or services provided by the organization and is a direct recipient of those goods or services from the organization. Such a nonmember is not considered to be entertained by a member even when accompanied by a member, but is instead considered to be a principal in a business transaction with the organization; and

    4. A "social member" is generally considered a member of the general public and a nonmember for IRC 501(c)(19) purposes unless the membership category is established in the bylaws and/or articles of incorporation. Such social members must be limited to no more than 2.5% of a veterans' organization's total membership.

  3. The member's spouse and dependents are treated as members.

  4. Member-sponsored groups, such as a Lions Clubs or school organizations, may be considered guests using a facts and circumstances test to determine whether participation furthers the organization's exempt purposes or activities.

  5. IRC 501(c)(19) Auxiliary Unit members are treated as members for nonmember income purposes. Consider the facts and circumstances in determining if the participation of Auxiliary Units not recognized as exempt under IRC 501(c)(19) furthers the organization's exempt purposes or activities.

    Example:

    A unit composed of adults play as an adult sports team and after the games the team, including non-501(c)(19) members, have full use of the bar and restaurant. Receipts from the non-501(c)(19) team members are considered nonmember income and are subject to unrelated business income tax.

    Example:

    If the unit described above was formed to play international sports under the sponsorship of the IRC 501(c)(19) organization, the sponsorship could be considered to be promoting social welfare, and thus, be an exempt activity. However, the income from the bar and restaurant would be subject to unrelated business income tax unless the organization can demonstrate such activity furthered the social welfare activity.

  6. Members from the parent veterans' organization and its subsidiaries will be treated as members for determining unrelated business income.

4.76.26.6.1  (07-01-2005)
Insurance Records

  1. Under IRC 512(a)(4), unrelated business income does not include any amount attributable to payments of life, sick, accident, or health insurance with respect to members or their dependents, which is set aside for the purpose of providing for the payment of insurance benefits or for a purpose specified in IRC 170(c)(4).

  2. The organization must maintain adequate records describing the amount set aside and the use of the set-aside funds to show the funds are used for insurance purposes or for the limited IRC 170(c)(4) purposes.

  3. A formal set-aside is not required for the income to be excluded from the unrelated business taxable income.

4.76.26.6.2  (07-01-2005)
Inadequate Books and Records

  1. Failure to maintain adequate books and records may adversely affect an IRC 501(c)(19) organization's exempt status and/or subject the organization to unrelated business income tax. Gross receipts derived from financial transactions with nonmembers are generally considered unrelated business income.

  2. For purposes of a current examination where records are inadequate, the examiner may accept any reasonable method on a one-time basis for determining the average member and nonmember usage of such facilities as a bar and restaurant. Thereafter, the organization must agree to maintain books and records in accordance with IRC 6001, and use a recognized accounting method to avoid unrelated business income tax liability for future years.

  3. If the organization does not maintain adequate records, the examiner will discuss the inadequacies with the group manager to determine whether an inadequate records notice should be recommended. If it is determined that a future examination should be made on the taxpayer, the examiner will prepare Form 5666, TEGE Referral Information Report, to request consideration of a subsequent follow-up examination.

4.76.26.7  (07-01-2005)
Adverse Effect of Nonmember Participation on Exempt Status

  1. Adequate books and records regarding financial information do not ensure retention of exemption. The examiner must also consider the activities of the organization in determining whether the organization continues to qualify for exempt status.

  2. Generally an organization receiving more than 50 percent of its gross receipts from nonmembers is considered to be primarily engaged in nonexempt activities and is not entitled to recognition of exemption.

  3. An organization may rebut the aforementioned presumption and retain its exempt status if it can demonstrate that all members, except member employees, devote at least 50 percent of their time to activities in furtherance of the organization's exempt function.

  4. Although the organization's rebuttal may preserve its exempt status, nonmember receipts may be subject to unrelated business income tax.

  5. Where the organization is dealing with nonmembers and wishes to contest the presumption that the income is subject to the unrelated business income tax, the organization's books and records should contain the following information:

    • Date;

    • Purpose of function;

    • Total number in the party;

    • Whether members sponsor the function and, if so, the name of the sponsors;

    • Number of members in the party;

    • Number of nonmembers in the party;

    • Total charges;

    • Charges paid by members; and

    • Charges paid by nonmembers.

4.76.26.7.1  (07-01-2005)
Facts and Circumstances

  1. If the organization receives a substantial portion of its gross income from the general public, the examiner should consider the facts and circumstances in determining if the organization is organized and operated within the meaning of IRC 501(c)(19):

    1. Review the minutes, Historian's record, activity books, Commander's Book, House Committee Report, committee reports, and reports to the parent, other intermediary organizations, or higher headquarters. Determine if the activities of the organization support the purposes listed in Treas. Regs. section 1.501(c)(19)-1(c);

    2. Interview the officers and members of the organization regarding the amount of time the organization devoted to exempt versus nonexempt activities. Ascertain the number of hours devoted by officers and volunteers to related activities, compared to the number of hours spent on unrelated activities;

    3. Review lease agreements, calendar of rentals, committee reports, etc., to determine the allocation of the use of the facilities for exempt and for nonexempt purposes; and

    4. Review financial reports, the cash receipts journal, and other supporting records. Determine what method the organization uses to allocate expenses to related and unrelated activities.

4.76.26.8  (07-01-2005)
Exempt Activities

  1. A veterans' organization must be operated for one or more of the purposes listed in Treas. Regs. section 1.501(c)(19)-1(c). The organization is not required to include all of the listed purposes or activities in its organizing instrument. However, the organization cannot have purposes of a substantial nature that are not listed and retain exempt status under IRC 501(c)(19). The exempt purposes are:

    1. Promoting the social welfare of the community as defined in Treas. Regs. section 1.501(c)(4)-l(a)(2);

    2. Assisting disabled and needy war veterans and members of the U.S. Armed Forces and their dependents and the widows and orphans of deceased veterans;

    3. Providing entertainment, care, and assistance to hospitalized veterans or members of the U.S. Armed Forces;

    4. Carrying on programs to perpetuate the memory of deceased veterans and members of the Armed Forces and to comfort their survivors;

    5. Conducting programs for religious, charitable, scientific, literary, or educational purposes (as set out in IRC 170(c)(4));

    6. Sponsoring or participating in activities of a patriotic nature;

    7. Providing insurance benefits for their members or dependents of their members (or both); and

    8. Providing social and recreational activities for their members.

4.76.26.8.1  (07-01-2005)
Nonexempt Activities

  1. Substantial unrelated activities may adversely effect exempt status. Such activities include:

    1. Renting out facilities to the general public;

    2. Opening bar and dining facilities to the general public;

    3. Selling liquor and/or food to members and/or the public for consumption off the premises; and

    4. Gaming activities with nonmembers.

4.76.26.8.2  (07-01-2005)
Bar, Restaurant, Hall Rental, and Gaming Activities

  1. The maintenance of a bar and/or restaurant is an exempt activity for an IRC 501(c)(19) organization, provided it is limited to bona fide members of the organization, members of the Auxiliary Units, and their bona fide guests.

  2. Participation by members of the parent organization and other affiliated auxiliaries would also be considered an exempt activity within the meaning of IRC 501(c)(19).

  3. If a guest of a member pays for goods and/or services, such income may be subject to unrelated business income tax.

  4. If fund-raising activities are open to the general public, the income generated may be subject to unrelated business income tax.

  5. If the bar and/or restaurant is open to the public, the activity may endanger the exempt status.

  6. Generally, rental income is excepted from unrelated business income per IRC 512(b)(3), unless the organization also provides services or the facility is debt-financed within the meaning of IRC 514.

    1. Review payables to ascertain whether any rental property is debt-financed.

  7. Income from a bona fide member of an IRC 501(c)(19) organization for social and recreational purposes is generally considered related income, whether or not it is rental income.

    1. Review advertisements, newsletters, member billings, and rental agreements. Determine if the organization rents its facilities to nonmembers along with providing services; and

    2. Compare names of individuals on rental agreements with list of member names.

4.76.26.8.3  (07-01-2005)
Gaming Activities

  1. The sponsorship of gaming activities, to the extent of the members' participation, is an activity related to the exempt purposes of an IRC 501(c)(19) organization.

  2. Thus, to the extent of member participation, income derived from the gaming activities is not subject to the tax on unrelated business income, provided such participation is documented.

  3. If the organization is unable to support the conclusion that such income was received from members, based on the facts and circumstances, the examiner may presume income to be from nonmembers.

  4. Participation by nonmembers in the sponsored gaming activities may be deemed unrelated to the sponsoring organization's exempt purposes, and may jeopardize the organization's exemption or result in the imposition of unrelated business income tax.

  5. Analyze revenue from gaming activities, such as pull-tabs, to determine whether it is considered unrelated income. Gaming activities involving nonmembers are generally not considered substantially related to the organization's exempt purpose(s). See IRM 4.76.50, EO Gaming Examination Guidelines, for further information.

4.76.26.8.4  (07-01-2005)
Exempt Activities Examination Guidelines

  1. Review the organization's articles of incorporation and bylaws to verify that the organization does not have substantial nonexempt purposes.

  2. Review minutes of the governing board, the organization's literature, correspondence, and solicitation of funds, to determine the organization's activities. Ensure the organization's primary activities are those described in Treas. Regs. section 1.501(c)(19)-1(c).

  3. Review advertisements, contracts, and lease agreements to identify possible nonexempt activities that could jeopardize exempt status or be subject to unrelated business income tax. Check for any indications that the organization:

    1. Rents out its facilities to nonmembers or the general public;

    2. Has facilities in excess of membership needs;

    3. Sponsors any activities open to nonmembers;

    4. Sells carry-out food to members and/or the public;

    5. Possesses an unrestricted or commercial liquor license; or

    6. Sells bottled liquor to members or nonmembers for consumption off the premises.

4.76.26.9  (07-01-2005)
Analysis of Sources of Income

  1. Analyze the cash receipts journal, bank statements, and the general ledger to identify sources of income.

  2. Review the organization's member and nonmember records to identify amount of nonmember income.

  3. Identify all potential unrelated business income. Refer to Publication 3386 on recordkeeping requirements for veterans' organizations exempt under IRC 501(c)(19).

4.76.26.10  (07-01-2005)
Analysis of Disbursements, Assets, and Liabilities

  1. No part of the net earnings of an IRC 501(c)(19) may inure to the benefit of any private shareholder or individual. Therefore, the following audit steps should be performed:

    1. Review cash disbursements journal, bank statements, financial reports, and other financial information for indications of private benefit or inurement;

    2. Review contracts and agreements for indications of benefits to officers or other individuals. An example would be rental of personal or real property to the organization at greater than fair market value; and

    3. Review and analyze the balance sheet. Look for receivables from officers, or unusual increases in assets or liabilities.

4.76.26.11  (07-01-2005)
Trusts and Foundations

  1. In examining IRC 501(c)(19) trusts or foundations which are organized for IRC 501(c)(19) purposes, determine whether:

    1. The trust or foundation has a legal existence;

    2. The corpus or income is diverted or used other than for the funding of a post or organization of veterans described in IRC 501(c)(19), for IRC 170(c)(4) purposes, or as an insurance set-aside as defined in Treas. Regs. section 1.512(a)-4(b);

    3. The trust unreasonably accumulates income. If the trust or foundation is not an insurance set-aside, ensure a substantial portion of the income is distributed to such post or organization or for IRC 170(c)(4) purposes; or

    4. The trust is organized exclusively for one or more of the purposes enumerated in Treas. Regs. section 1.501(c)(19)-(c).


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