Exempt Organizations
Agency decision
Ask Donna
What actually matters in this document.
Text
Exempt Organizations
Technical Guide
TG 8: Fraternal Beneficiary Societies and
Domestic Fraternal Societies – IRC Section
501(c)(8) and IRC Section 501(c)(10)
This document is not an official pronouncement of the law or the position of the Service and cannot be
used, cited, or relied upon as such. This guide is current through the revision date. Changes after the
revision date may affect the contents of this document and users should consider any subsequent
resources to ensure technical accuracy. All references to “Section” in this document refer to the Internal
Revenue Code of 1986, as amended, unless specifically noted otherwise. The taxpayer names and
addresses shown in examples within this publication are fictitious.
Technical Guide Revision Date: 2/1/2024
Publication 5921 (2-2024) Catalog Number 94645X Department of the Treasury Internal Revenue Service www.irs.gov
Table of Contents
I. Overview................................................................................................ 4
A. Background / History ...................................................................... 4
A.1. Section 501(c)(8): Fraternal Beneficiary Societies ............. 4
A.2. Section 501(c)(10): Domestic Fraternal Societies............... 6
B. Relevant Terms ............................................................................... 6
C. Law / Authority ................................................................................ 7
C.1. Section 501(c)(8): Fraternal Beneficiary Societies ............. 7
C.2. Section 501(c)(10): Domestic Fraternal Societies............... 7
II. Exemption Issues ................................................................................. 8
A. Exemption Requirements Under Section 501(c)(8)...................... 8
A.1. Fraternal Purposes and Activities ........................................ 8
A.2. Operating Under the Lodge System................................... 11
A.3. Benefits Provided by Section 501(c)(8) Fraternal
Organizations ....................................................................... 13
A.4. Operate for the Exclusive Benefit of Members of a
Fraternity .............................................................................. 18
A.5. Fraternal Activities and Benefits Must Be Primary........... 19
B. Exemption Requirements Under Section 501(c)(10).................. 21
C. Comparison Between Organizations Exempt Under Section
501(c)(10) and Section 501(c)(8) .................................................. 22
D. Comparison Between Organizations Exempt Under Section
501(c)(10) and Section 501(c)(7) .................................................. 23
III. Unrelated Business Taxable Income ................................................ 24
2
A. Sale of Alcoholic Beverages ........................................................ 24
B. Participation of Nonmembers in Activities ................................. 25
C. Gambling Activities ...................................................................... 25
D. Rents from Real Property ............................................................. 27
D.1. Hall Rental and Catering ..................................................... 28
IV. Deductibility of Contributions ........................................................... 29
V. Filing Requirements ........................................................................... 29
A. Annual Return or Notice ............................................................... 29
A.1. Automatic Revocation ......................................................... 30
B. Unrelated Business Taxable Income........................................... 30
C. Employment and Unemployment Tax ......................................... 30
VI. Application for Recognition of Exemption ....................................... 31
VII. Examination Techniques ................................................................... 31
A. Operating Under the Lodge System ............................................ 31
B. Membership and Fraternal Activities .......................................... 31
C. Payment of Benefits by Section 501(c)(8) Organizations .......... 32
D. Unrelated Business Income ......................................................... 32
E. Employment Taxes and Information Returns............................. 33
F. Related Entities ............................................................................. 34
G. Separate Segregated Funds for Charitable Purposes ............... 35
VIII.
References..................................................................................... 36
A. EO CPE Texts ................................................................................ 36
3
I. Overview
(1) This Technical Guide (TG) discusses the law, regulations, and federal income
tax issues with respect to fraternal beneficiary societies described under
Internal Revenue Code (IRC) Section 501(c)(8) and domestic fraternal societies
under IRC Section 501(c)(10).
Note: This TG references General Counsel Memoranda (GCM). Although
GCMs may not be used or cited as precedent, they do offer additional tax law
analysis considerations when precedential guidance doesn’t exist.
A. Background / History
A.1. Section 501(c)(8): Fraternal Beneficiary Societies
(1) Fraternal societies have existed in the U.S. at least since the 19th century. They
were first exempted from federal income taxation under section 38 of the Tariff
Act of August 5, 1909, 36 Stat. 113 (1909). The Act exempted “fraternal
beneficiary societies, orders, or associations operating under the lodge system,
and providing for the payment of life, sick, accident, and other benefits to the
members of such societies, orders, or associations, and dependents of such
members…” The language (that became the current Section 501(c)(8))
providing exemption for fraternal beneficiary societies has remained almost the
same since the Act.
(2) The Revenue Act of 1913, Pub. L. No. 63-6, Section II, G.(a), 38 Stat. 172,
extended the exemption to organizations described under Section 501(c)(8)
operating, “for the exclusive benefit of the members of a fraternity itself
operating under the lodge system, and providing for the payment of life, sick,
accident, and other benefits to the members of such societies, order, or
associations and dependents of such members…” The general purpose of the
change was to allow a separately organized insurance branch of a fraternal
society to qualify for exemption.
(3) Some mutual insurance companies may claim to be fraternal beneficiary
societies where state laws exempt fraternal societies from insurance
regulations.
(4) GCM 38192 (Dec. 7, 1979) discusses the historical development of personal
insurance generally and indicates that the amount of life insurance written by
fraternal societies grew rapidly during the 1880s and the 1890s. During this
time, the amount of insurance written by fraternal societies exceeded the
amount written by commercial insurers. The GCM further provides the intent of
the exemption of fraternal beneficiary societies from federal income tax as
follows:
Fraternal beneficiary societies were first exempted by section
38…of the Tariff, of 1909…. The 1939 Act provided, generally,
for an excise tax of one percent on the net income over $5,000
of, inter alia, all insurance companies, but excepted, inter alia,
4
‘fraternal beneficiary societies, orders, or associations operating
under the lodge system and providing for the payment of life,
sick, accident and other benefits to the members of such
organizations.’ The intent of the exception was to exclude from
the term ‘all insurance companies’ fraternal beneficiary societies
not organized for profit that provided life, sick, accident and other
benefits as ‘a mere incident to the other part of their work, which
is fraternal and charitable.’ 44 Cong. Rec. 3937 (1909).
(5) Nat’l Union v. Marlow, 74 F. 775 (8th Cir. 1896), described a situation in which
the wife of George W. Marlow sued National Union to recover life insurance
benefits following the suicide of her husband. National Union, whose
geographic areas of operation included Missouri, contended that the suicide of
the deceased constituted a full and complete defense to the suit. Missouri state
law however, provided that “[i]n all suits upon policies of insurance on life
hereafter issued by any company doing business in this state, it shall be no
defense that the insured committed suicide.” Nevertheless, National Union
claimed that it was a “fraternal-beneficial society” rather than an insurance
company and therefore wasn’t subject to the insurance laws of the state.
The court provided:
We find nothing in the various sections of the Missouri
statute…which justifies the conclusion that the lawmaker
intended to create a class of corporations, termed ‘fraternalbeneficial societies,’ for the sole and only purpose of doing an
insurance business…The statute…shows, as we think, very
plainly, that a fraternal-beneficial society can only become a
body politic and corporate by satisfying the court…that it is
engaged in some work, or proposes to become so engaged,
which is distinctively of a fraternal and beneficial nature.
The court concluded:
In view of the purposes of the order, as disclosed by its
constitution and laws, it is obvious, we think, that [National
Union] is not a fraternal-beneficial society…Or, in other words,
when the defendant is stripped of all disguises, and judged by
the standard of what it is engaged in doing, and what it was most
likely organized to do, it is simply an insurance company which
carries on an extensive business….
(6) As demonstrated in National Union v. Marlow, some insurance companies may
claim to be fraternal beneficiary societies where state laws exempt fraternal
societies from insurance regulations.
5
A.2. Section 501(c)(10): Domestic Fraternal Societies
(1) Section 501(c)(10) was enacted by the Tax Reform Act of 1969, Pub. L. No. 91172, section 121(b)(5)(A) (1969), 83 Stat. 487, 541. It added a route to
exemption under 501(a) for fraternal societies that don’t offer any insurance
benefits to their members. Prior to this enactment, there was no exemption
provided for fraternal societies operating under the lodge system that didn’t, in
addition to their fraternal activities, also provide for the payment of life, sick,
accident, and other benefits to their members.
(2) The Senate Committee on Finance explained the purpose of Section 501(c)(10)
as follows:
[A] new category of exemption for fraternal beneficiary associations
is set forth which applies to fraternal organizations operating under
the lodge system where the fraternal activities are exclusively
religious, charitable, or educational in nature and no insurance is
provided for the members. The committee believes that it is
appropriate to provide a separate exempt category for those
fraternal beneficiary associations (such as the Masons) which do
not provide insurance for their members. This more properly
describes the different types of fraternal associations.
See S. Rep. No. 552, 91st Cong., 1st Sess. 72 (1969).
B. Relevant Terms
(1) Fraternal: The term fraternal generally means having a common bond, a
common tie, or a common goal. This term isn’t defined in the Code or in the
regulations. The term is generally used in the ordinary sense and according to
its legal significance at the time the Tariff Act of 1909 was passed. See
Commercial Travelers’ Life & Accident Association v. Rodway, 235 F. 370 (N.D.
Ohio 1913).
(2) Lodge system: Treas. Reg. 1.501(c)(8)-1(a) provides that an organization is
operating under the lodge system if it carries out its activities under a form of
organization that comprises local branches called lodges, chapters, and other
similar designations. The local branches must be chartered by a parent
organization and be largely self-governing.
(3) Life, sick, accident, or other benefits: Treas. Reg. 1.501(c)(8)-1(a) provides
that in order to be exempt under Section 501(c)(8), 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. However, these terms aren’t
clearly defined in the Code or in the regulations in the context of a fraternal
beneficiary society described under Section 501(c)(8). In general, sick benefits
are designed to compensate for loss of income during a period of illness.
Accident benefits are designed to compensate for a loss of earning power
resulting from an injury. Other benefits must be similar in nature to life, sick, and
accident benefits and should be designed to compensate for expenses resulting
6
from injury or loss of earning power. See “Benefits Provided by Section
501(c)(8) Fraternal Organizations,” below for further discussion.
C. Law / Authority
C.1. Section 501(c)(8): Fraternal Beneficiary Societies
(1) Section 501(c)(8): Fraternal beneficiary societies, orders, or associations are
exempt from federal income tax, if they are:
(A) operating under the lodge system or for the exclusive benefit of the
members of a fraternity itself operating under the lodge system, and
(B) providing for the payment of life, sick, accident, or other benefits to the
members of such society, order, or association or their dependents.
(2) Treas. Reg. 1.501(c)(8)-1(a): 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.
C.2. Section 501(c)(10): Domestic Fraternal Societies
(1) Section 501(c)(10): Domestic fraternal societies, orders, or associations,
operating under the lodge system are exempt from federal income tax, if:
(A) the net earnings of which are devoted exclusively to religious,
charitable, scientific, literary, educational, and fraternal purposes, and
(B) which do not provide for the payment of life, sick, accident, or other
benefits.
(2) Treas. Reg. 1.501(c)(10)-1(a): For taxable years beginning after December 31,
1969, an organization qualifies 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.
Any organization described in section 501(c)(7), such as, for example, a
national college fraternity, is not described in section 501(c)(10) and this
section.
7
II. Exemption Issues
A. Exemption Requirements Under Section 501(c)(8)
(1) To be described in Section 501(c)(8), an organization must meet the following
requirements:
a. it must have a fraternal purpose,
b. it must operate under the lodge system, and
c. it must provide for the payment of life, sick, accident, or other benefits.
(2) An exception applies to separately organized insurance branches of fraternal
societies. These need not operate under the lodge system but must provide
permissible benefits exclusively to members of a lodge system.
A.1. Fraternal Purposes and Activities
(1) The Code and the regulations don’t define a fraternal beneficiary society. The
court in Nat’l Union v. Marlow summed up the nature of a fraternal beneficiary
society as follows:
[A] fraternal-beneficial society…would be one whose members
have adopted the same, or a very similar, calling, avocation, or
profession, or who are working in unison to accomplish some
worthy object, and who for that reason have banded themselves
together as an association or society to aid and assist one
another, and to promote the common cause. The term ‘fraternal’
can properly be applied to such an association, for the reason
that the pursuit of a common object, calling, or profession usually
has a tendency to create a brotherly feeling among those who
are thus… engaged. It is a well-known fact that there are at the
present time many voluntary or incorporated societies which are
made up exclusively of persons who are engaged in the same
avocation. As a general rule such associations have been
formed for the purpose of promoting the social, moral, and
intellectual welfare of the members of such associations, and
their families, as well as for advancing their interests in other
ways and in other respects…. Many of these associations make
a practice of assisting their sick and disabled members, and of
extending substantial aid to the families of deceased members.
Their work is at the same time of a beneficial and fraternal
character, because they aim to improve the condition of a class
of persons who are engaged in a common pursuit, and to unite
them by a stronger bond of sympathy and interest.
(2) A Section 501(c)(8) organization must have a fraternal element, sometimes
referenced as a common bond in guidance and caselaw, among its members.
The requirement of a fraternal element was set forth in Appeal of Philadelphia &
Reading Relief Ass’n, 4 B.T.A. 713 (1926). The court held that the organization
8
of railroad company employees that made payments to members who became
disabled because of accident or sickness wasn’t entitled to exemption as a
fraternal beneficiary association because it wasn’t organized for any fraternal
purpose. The court provided that there was no fraternal element present where
the sole motive in joining an organization was to receive insurance benefits.
The court stated:
In dealing with cases coming under section 231 of the Revenue
Act of 1918, the character of the organization must be judged by
its articles of incorporation, constitution, and by-laws, or by what
other instrument it is governed…. Search the petitioner’s
governing regulations as we may…we are unable to discover,
even in a remote degree, a single fraternalistic feature in its
organization. It is entirely without any social features. Its
membership is made up of individuals whose vocations are as
[numerous] and diverse as the classifications of employment of a
great railway system…. There is no fraternal object which moves
them to seek membership in the Association, but rather the
motive is mercenary. The petitioner has neither lodges, rituals,
ceremonial, or regalia; and it owes no allegiance to any other
authority or jurisdiction. It is not a ‘fraternal beneficiary
association’ operating under the lodge system, within the
meaning of section 231(3) of the Revenue Act of 1918, and,
therefore, is not entitled to exemption under the provisions of that
section.
(3) Neither the Code nor the regulations under Section 501(c)(8) specify the kind of
activities an organization must engage in to be operated under the lodge
system, nor do they require a fraternal beneficial society to hold regular
meetings in order to satisfy the requirements for tax exemption. The court in W.
Funeral Ben. Ass’n v. Hellmich, 2 F.2d 367 (E.D. Mo. 1924), stated “the ‘lodge
system’ is generally understood as an organization which holds regular
meetings at a designated place, adopts a representative form of government,
and performs its work according to ritual.” Thus, an organization that provides
insurance to members of 80 to 100 lodges or organizations isn’t, for that
reason, itself operated under the lodge system, though the organization may
qualify for exemption under Section 501(c)(8) if it establishes it, in fact, is
operated exclusively for the benefit of the members of fraternal societies
themselves operating under the lodge system. See “Operate for the Exclusive
Benefit of Members of a Fraternity Itself Operating Under the Lodge System” in
this TG for more information.
(4) A former regulation, Article 89 of Regulations 33, dealing with section 2 of the
Income Tax Act of 1913, defining a fraternal beneficiary society as having “an
adopted ritual or ceremonial, holding meetings at stated intervals,” is no longer
strictly in force. The conduct of regular localized meetings on an annual
schedule or at more frequent periodic intervals, with or without the observance
9
of ritualistic ceremonies, is but one possible means of achieving the fraternal
objectives of a membership organization. A fraternal beneficiary society’s
performance of civic, benevolent, or charitable functions may also serve to
establish a fraternal purpose in lieu of regular meetings or rituals. Other kinds of
fraternally-oriented functions, such as the conduct of civic, benevolent, or
charitable functions, may be acceptable substitutes for local lodge meetings or
the regular use of ritualistic ceremonies. However, an organization whose
fraternal features are so insubstantial as to make it indistinguishable from an
ordinary insurance company doesn’t qualify for tax exemption under Section
501(c)(8). See GCM 34607 (Sept. 13, 1971).
(5) While social activities often play a significant role in a fraternal society, the
requirement of a common “calling, avocation, or profession,” or “pursuit of a
common object” as described above in Appeal of Philadelphia & Reading Relief
Ass’n, isn’t satisfied by the presence of social activities alone. The court, in
Polish Army Veterans Post 147 v. Comm’r, 24 T.C. 891 (1955), vacated on
other grounds sub nom. Polish Army Veterans v. Comm’r, 236 F.2d 509 (3d Cir.
1956), concluded that the organization didn’t establish its exemption as a
fraternal beneficiary society because its members lacked a common bond:
To qualify for the exemption an organization must be fraternal….
Here only the active members, comprising less than 10 percent
of the total membership of the Post, had a common tie. They, of
course had the bond of having formerly served in the Polish
Army. But approximately 90 percent of the total membership of
the Post were social members who were not ex-members of the
Polish Armed Forces and who…had nothing in common with the
active members or with each other. An organization cannot be
classes [sic] as fraternal where the only common bond between
the majority of the members is their membership in that
organization.
(6) A mere recitation of common bond in the governing instrument isn’t enough;
there must be a common bond in fact among the members. The court in
Fraternal Ord. of Civitans of Am. v. Comm’r, 19 T.C. 240 (1952) stated:
The members of the [organization] had nothing in common, so
far as this record shows, except that they were members of the
[organization] and it is difficult to detect the fraternal bond
required by the statute. It does not appear what, if anything, was
ever done by the [organization] to accomplish any of the
purposes set forth in its constitutions and by-laws.
(7) In Hip Sing Ass’n Inc. v. Comm’r, 43 T.C.M. 1092 (T.C. 1982), the Tax Court
found a common tie among members of an association based on their common
ethnic background. It also found that members had a common goal to improve
their social, moral, and intellectual welfare.
10
(8) Likewise, persons who join together to promote a common interest, such as a
particular method of fortune telling, can be said to have a common bond.
Revenue Ruling 77-258, 1977-2 C.B. 195, describes an organization formed to
provide a fraternal framework for social contact among its members who are
interested in the use of and the philosophy behind a method used in fortune
telling. In furtherance of its purpose, the organization conducts monthly
meetings and provides instructions on the use of the method to its members. In
addition, the organization provides instruction on the use of the method,
maintains a reference library, and supplies information on the method to the
general public. By carrying on the fraternal and educational activities, the
organization is operating as a fraternal society. Accordingly, because the
organization operates under the lodge system, doesn’t provide for the payment
of life, sick, accident, and other benefits, and devotes its income exclusively to
educational and fraternal purposes, it is exempt from federal income tax under
Section 501(c)(10).
A.2. Operating Under the Lodge System
(1) Treas. Reg. 1.501(c)(8)-1(a) provides that 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.”
(2) In addition to organizations operating under the lodge system, the Code
provides exemption under Section 501(c)(8) for entities that “operate…for the
exclusive benefit of members of a fraternity itself operating under the lodge
system.” See “Operate for the Exclusive Benefit of Members of a Fraternity
Itself Operating Under the Lodge System” in this TG for further discussion.
(3) The term operating under the lodge system implies, at a minimum, two active
entities: a parent and a subordinate (referred to as a lodge). In general, an
organization is operating under the lodge system when the parent and local
organizations exist and are active. Additionally, there are no clear rules setting
forth any minimum requirements regarding the regularity or frequency of
membership meetings at the local level as long as the lodge system is
effectively used as a means of maintaining a representative form of
government. Furthermore, there are no specifications as to the kinds of
activities an organization must engage in to be operated under the lodge
system.
(4) Rev. Rul. 55-495, 1955-2 C.B. 259, holds that an organization which doesn’t
have a parent organization or subordinate branches doesn’t qualify for tax
exemption under Section 501(c)(8) because it doesn’t operate under the lodge
system. In addition, Rev. Rul. 55-495 holds that such an organization may
qualify for tax exemption as a social welfare organization under Section
501(c)(4). Rev. Rul. 75-199, 1975-1 C.B. 160, modified Rev. Rul. 55-495 to
11
remove from the conclusion that an otherwise fraternal organization not
operating under the lodge system may qualify for tax exemption under Section
501(c)(4), however, it affirms the holding in Rev. Rul. 55-495 that such an
organization is not tax-exempt under Section 501(c)(8).
(5) Similarly, Rev. Rul. 63-190, 1963-2 C.B. 212, describes an organization (not
operating under the lodge system), which maintains a social club for members
and also provides sick and death benefits for members and their beneficiaries.
Citing Treas. Reg. 1.501(c)(8)-1(a), Rev. Rul. 63-190 provides that operating
under the lodge system means carrying on 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. As the
organization described in Rev. Rul. 63-190 doesn’t operate under the lodge
system, it doesn’t qualify for tax exemption under Section 501(c)(8).
(6) The court in Fraternal Order of Civitans of America v. Commissioner held that
an organization, incorporated in 1937, whose members voted in 1946 to
separate the “National Lodge” from the parent lodge and elected from their own
membership national officers, wasn’t operating under the lodge system prior to
1946 “in that the petitioner was the only organization of its kind in existence and
the record does not show that there was any ‘parent organization’ separate
from the petitioner.” The organization failed to show that it was a fraternal
beneficiary society operating under the lodge system under Section 501(c)(8).
Note: An organization may be exempt under Section 501(c)(8) even if it’s not
operated under the lodge system itself as long as it’s operated for the exclusive
benefit of the members of a Section 501(c)(8) organization that is so operated.
See “Operate for the Exclusive Benefit of Members of a Fraternity Itself
Operating Under the Lodge System” in this TG for further discussion.
(7) Each lodge operating under the lodge system must be recognized as a
subordinate by a parent. But that doesn’t mean that a new lodge must be
created by the parent. The court case, Hip Sing Association, Inc. v.
Commissioner, illustrated that existing autonomous organizations can choose to
operate under the lodge system by banding together and creating their own
parent. The Tax Court in Hip Sing Association, Inc. v. Commissioner stated:
…[T]here is nothing explicit in either the statute or the language
of this regulation which requires that the parent organization be
created first and then for the parent to create the subordinate
organizations. Logic would dictate that qualification under the
statute should not be affected by whether the subordinate
organizations form the national or the converse…. When the
various local associations banded together formally to create a
national organization, they created their own parent in the sense
that a central organization must be considered to be in a position
to support and give direction to its constituents. The regulation
recognizes that, as here, the constituent organizations may be
12
‘largely self-governing.’ With the creation of the national or
central Hip Sing entity, each of the then existing local
associations, including petitioner, must be deemed to have been
simultaneously “chartered by the parent they created.” Certainly,
they were the “charter members” of the national. We conclude,
therefore, that petitioner is ‘operating under the lodge system’
within the meaning of the Code and the applicable regulations. In
all respects during these years, it qualifies as a domestic
fraternal association as described in section 501(c)(10), and it is,
therefore, exempt from tax.
(8) It is possible for existing lodges to create additional lodges. In Rev. Rul. 73-370,
1973-2 C.B. 184, a lodge of a fraternal beneficiary society forms a subordinate
lodge to carry out the activities of the society within a particular geographic
area. The parent authorizes the local lodges to create subordinate
organizations to carry its fraternal and charitable activities into additional
geographical areas to facilitate the growth of the society and to increase
participation in its activities. The new organization operated under a charter
from the local lodge, and its members must adhere to the rules and regulations
of the local lodge and the laws and edicts of the parent. This ruling holds that
the new organization functions as part of the lodge system of a fraternal society.
Because its net earnings are devoted exclusively to charitable and fraternal
purposes, and it doesn’t provide for the payment of life, sick, accident, or other
benefits to its members, it is exempt under Section 501(c)(10).
A.3. Benefits Provided by Section 501(c)(8) Fraternal Organizations
(1) To qualify for exemption under Section 501(c)(8), a fraternal beneficial society
must provide for the payment of life, sick, accident, or other benefits. There are
two issues that must be considered to determine if the benefits comply with
exemption requirements under Section 501(c)(8):
•
Whether most of the fraternal members are provided benefits
•
Whether the type of benefit is permissible
(2) The first issue is whether most of the fraternal members are provided benefits.
The issue of whether most of the fraternal members are provided benefits has
two components.
a. The first component focuses on the word most when considering whether
most of the members are provided benefits. See Rev. Rul. 64-194, 1964-2
C.B. 149. The court case, Polish Army Veterans Post 147 v. Comm’r, 24
T.C. 891 (1955), vacated on other grounds sub nom., Polish Army
Veterans v. Comm’r, 236 F.2d 509 (3d Cir. 1956), demonstrated this
requirement by concluding that an organization didn’t qualify as a fraternal
organization where most of its members weren’t entitled to receive any
benefits. In this case, approximately 90% of the total membership was not
entitled to receive benefits from the organization.
13
b. However, most doesn’t have to be all, as explained in Rev. Rul. 64-194.
The ruling holds that exemption under Section 501(c)(8) isn’t precluded
where most of the members of the organization are eligible to receive the
benefits provided by the organization.
c. In Rev. Rul. 64-194, the organization had two classes of membership:
beneficial and social. Beneficial membership was available only to a
member who joined the organization prior to their 50th birthday and the
member was then entitled to sick, accident, and death benefits. Social
membership was available to a member who joined the organization on or
after the member’s 50th birthday. Social membership carried all club
privileges, but did not confer any sick, accident, or death benefits.
Substantially all of the members were beneficial members. The fund from
which benefits were paid to beneficial members was contributed to solely
by beneficial members and was kept separate from the general funds of
the organization. Rev. Rul. 64-194 found that the age restriction on
beneficial membership was a reasonable means to discourage
membership by those interested more in obtaining benefits than in
furthering the fraternal purposes of the organization.
d. In addition, tax exemption won’t be jeopardized where benefits to others
outside the organization are incidental to the accomplishment of the
society’s exempt purpose. Rev. Rul. 78-87, 1978-1 C.B. 160, described an
organization that participates in the reinsurance pool and makes the
agreed payments into it for protection against excessive losses on major
medical health and accident insurance. Although other insurers also
participated in the pool and may have derived a similar benefit from it, the
purpose of the fraternal beneficiary society was to promote its own
financial stability by participating in spreading the risk of loss in this
manner. It undertook participation, therefore, in the best interest of its
members, and any benefit derived by other insurers from participation in
the pooling arrangement was incidental to the accomplishment of the
organization’s exempt purpose and did not detract from the conclusion
that it was operated for the exclusive benefit of its members. Therefore,
the participation of the organization in a state-sponsored reinsurance pool
furthered its exempt purposes and wouldn’t cause the organization to lose
its tax-exempt status under Section 501(c)(8).
e. The second component of whether a substantial number of the fraternal
members are provided benefits focuses on the word provided. As
explained in Rev. Rul. 76-457, 1976-2 C.B. 155, the benefits must
automatically accrue to the member as part of the dues paid. In Rev. Rul.
76-457, the organization was involved in an arrangement with
independent insurers whereby members, on an individual application to
the insurers and not automatically by virtue of membership in the
organization, could obtain insurance at a reduced cost. The organization
14
didn’t qualify for exemption under Section 501(c)(8) because it didn’t
provide an insurance benefit. Instead, members had the option to
purchase insurance directly from an insurance company using their
personal funds.
(3) The second issue that must be considered to determine if the benefits comply
with exemption requirements under Section 501(c)(8) is whether the type of
benefit is permissible. Life, sick, and accident benefits are specifically
enumerated in Section 501(c)(8). Rev. Rul. 86-75, 1986-1 C.B. 245, holds that
whole life insurance constitutes a life benefit under Section 501(c)(8) even
though the member may borrow against the cash surrender value of the
contract or withdraw the cash surrender value and terminate the contract. Sick
benefits are designed to compensate for loss of income during a period of
illness, and accident benefits are designed to compensate for a loss of earning
power resulting from an injury.
(4) Section 501(c)(8) also lists other benefits as permissible benefits. GCM 38192
(Dec. 7, 1979) discussed the historical development of Section 501(c)(8)
benefits and concluded that in order for a benefit to be included within the term
other benefits, it must be similar in nature to protection designed to compensate
for expenses resulting from injury or loss of earning power.
(5) Rev. Rul. 84-48, 1984-1 C.B. 133, provides guidance explaining what other
benefits means. It concludes that other benefits must be similar in nature to life,
sick, and accident benefits and that they should be designed to compensate for
expenses resulting from bodily injury or loss of earning power. In Rev. Rul. 8448, the organization maintained a legal defense fund to defend members
against criminal, civil, and administrative misconduct charges to protect against
financial loss directly related the loss of earning power. As such, the legal
defense fund benefit was considered other benefits within the meaning of
Section 501(c)(8). The ruling states:
Historically, sick benefits have been understood to include
benefits designed to compensate for loss of income during a
period of illness, and accident benefits have been understood to
encompass benefits payable due to a loss of earning power
resulting from an injury…. For a benefit to be of a like kind and
nature to sick or accident benefits and, therefore, to be included
within the term ‘other benefits’ under section 501(c)(8) of the
Code, the benefit must be similar in nature to protection
designed to compensate for expenses resulting from bodily injury
or loss of earning power.
Thus, payments from a legal defense fund maintained by a fraternal beneficiary
society are other benefits if the payments protected against the risk of loss of
earning power.
(6) Rev. Rul. 84-49, 1984-1 C.B. 134, illustrates another example of other benefits
providing financial security after loss of earning power. In the ruling, an
15
organization that operated an orphanage open to surviving dependent children
of any deceased member was granted exemption under Section 501(c)(8). The
expenses of the orphanages were paid from a separate fund supported by
members’ dues. The ruling notes that although it differs from life insurance
benefits because it’s a non-cash benefit, the organization’s orphanage serves
the same purpose that life insurance serves. Life insurance provides a measure
of financial security to the insured’s survivors if the insured dies. Similarly, the
organization’s orphanage provided its members’ children security against
becoming wards of the state if their parents died.
(7) GCM 39575 (1986) indicates that an annuity is a permissible other benefit
because it protects against a “risk of loss of earning power” affecting the
financial stability of its members. In addition, an annuity may also be considered
a life benefit to permit the provision of life insurance among the benefits
provided by fraternal beneficiary societies. GCM 39575 states:
Life insurance protects against the absence of income in the
event of premature death or disability, whereas the annuity
protects (insures) against the absence of income on the part of
those ‘afflicted’ with undue longevity. Both means dependable
protection to two unfortunate groups, the one dying too soon and
the other living too long. They are both insurance arrangements,
the one pertaining to the years of ascendancy, and the other to
the years of decline. When coupled together, the two forms of
insurance complete the economic program from start to finish on
a basis of financial dependability….
…It is our opinion that the risk of outliving one’s savings is a ‘risk
of loss,’ i.e. of outliving savings intended to provide financial
security later in life by living longer than expected. This risk of
loss involves the risk of loss of earning power, i.e., of one’s
livelihood intended to provide financial security during one’s
working life, that may occur as a result of the loss of employment
as described in Rev. Rul. 84-48…. In this sense, an annuity is a
permissible ‘other benefit’ within the meaning of section
501(c)(8)…. Furthermore, based upon the technical explanation
of annuities and their function within the realm of life
insurance…, it appears that an annuity may also be considered a
‘life benefit,’ as that term is used within the meaning of section
501(c)(8), to permit the provision of life insurance among the
benefits provided by fraternal beneficiary societies.
(8) However, an organization may not qualify under Section 501(c)(8) if it doesn’t
provide traditional types of insurance benefits listed in Section 501(c)(8) in
addition to providing annuities. See GCM 39575 (1986).
(9) In Grange Ins. Ass’n of Cal. v. Comm’r, 317 F.2d 222 (9th Cir. 1963), the Ninth
Circuit disagreed with the Tax Court’s position that accident insurance refers
16
only to bodily injury to the person. Instead, the Ninth Circuit concluded that,
“‘accident’ benefits include payment for damage to property quite as naturally
as payment for injury to the person” and, therefore, “the statutory phrase
‘accident or other benefits’ is sufficiently broad to include payments for injuries
to property as well as to the person.” In considering the purpose of the
exemption, the Ninth Circuit stated, “the moving consideration was the
character and purpose of the organization. Nowhere have we found any
indication that Congress intended the exemption to depend upon the type of
benefits paid.”
(10)However, in footnote 1 to GCM 38192 (Dec. 7, 1979), Associate Chief Counsel
indicated that “…the Service will not follow the decision in Grange Insurance
Assn. of California v. Commissioner, 317 F.2d 222 (9th Cir. 1963),” and instead
provided that accident and other benefits don’t include payments for injury to
property. Life, sick, and accident benefits are payable with respect to an
individual, while property insurance protects against property loss. The footnote
in GCM 38192 states that “This division between ‘personal insurance’ and
‘property insurance’ is long recognized. See G.C.M. 35639, (January 28,
1974).” In GCM 35639, the Service showed an intent not to follow Grange Ins.
Ass’n of Cal. v. Comm’r outside of the Ninth Circuit in its holding that property
insurance benefits are “accident or other benefits.” GCM 35639 notes, “The
term ‘accident or other benefits’ as used in section 501(c)(8) of the Code
includes payments for injuries to a member’s person but not payments for loss
or damage to a member’s property.”
(11)The phrase “life, sick, accident, or other benefits” also appears in Section
501(c)(9) to describe permissible benefits provided by voluntary employees’
beneficiary associations. In GCM 35639, the Service decided that Section
501(c)(8) interpretations of the phrase “life, sick, accident, or other benefits”
need not be construed consistently with Section 501(c)(9) interpretations. GCM
35639 notes that “Not only did the earliest predecessor of Code § 501(c)(8)
antedate enactment of the predecessor of Code § 501(c)(9) by some 19 years,
but…the history and development of the organizations covered by the
respective sections is sufficiently different to justify different interpretations,
particularly of the scope of the phrase ‘other benefits,’ under the two sections.”
For instance, voluntary employees’ beneficiary associations, whose members
are bound together by their common employment, have a relationship to labor
organizations that few, if any, fraternal beneficiary societies share. Thus,
interpretations of the statutory language for purposes of either Section aren’t
required to be identical in all respects. Additionally, GCM 39212 (April 13,
1984), indicates that, “[d]espite the similar wording in both sections, it is not
intended that the scope of section 501(c)(9), or section 1.501(c)(9)-3(d) defining
‘other benefits,’ control with respect to the same question under section
501(c)(8).”
17
A.4. Operate for the Exclusive Benefit of Members of a Fraternity
(1) In addition to organizations operating under the lodge system (i.e., parents and
their subordinate lodges), the Code provides exemption under Section 501(c)(8)
for entities “operating…for the exclusive benefit of members of a fraternity itself
operating under the lodge system, and…providing for the payment of life, sick,
accident, or other benefits to the members of such society…or their
dependents.” Such organizations are understood to be separately organized
insurance branches of fraternal societies.
(2) An organization may be exempt under Section 501(c)(8), even if it’s not
operated under the lodge system itself, as long as it’s operated for the exclusive
benefit of the members of a Section 501(c)(8) organization that is so operated.
A separately organized insurance branch of a fraternal society need not benefit
all the members of a lodge system. It may serve the members of a single lodge.
Rev. Rul. 73-192, 1973-1 C.B.225, concerns an organization composed of
members of a lodge of a fraternal beneficiary society operating under the lodge
system. Its charter limits its membership to members of this lodge. Its sole
purpose and activity are to provide for the payment of life, sick, and accident
benefits exclusively for members of the lodge or their dependents. Thus, even
though the organization doesn’t operate under the lodge system, it operates
exclusively for the benefit of the members of a fraternal beneficiary society itself
operating under the lodge system, and it provides life, sick, and accident
benefits to the members of that society. Accordingly, the ruling holds that the
organization is exempt under Section 501(c)(8).
(3) The organization in W. Funeral Ben. Ass’n v. Hellmich asserted that it was
carrying on its activities for the exclusive benefit of the members of many
fraternities operating under the lodge system. However, the court held that the
organization was not operating for the exclusive benefit of the members of a
fraternity itself operating under the lodge system. The court stated:
…It seems to have been fairly well disclosed that plaintiff
accepted business from organizations who chose to adopt its
plan without any particular inquiry into the nature of the
organizations or the manner in which they carried on their
business. It is contended that the policy holders of plaintiff, who
are not members of duly constituted lodges, are so insignificant
that that fact ought not to affect the situation in view of the
general nature of plaintiff’s business. This probably is true, but
the plaintiff is claiming an exemption from taxation and in doing
so asserts that it comes within the exemption clause of a certain
statute. It does not seem to be asking too much of it that it fairly,
if not strictly, bring itself within the terms of the statute. The rule
by which we are to be governed, as above stated, required of the
plaintiff a strict degree of proof in order to establish its
exemption. It seems that it has not brought itself within the
18
statute even if we only require a reasonably and fairly exact
degree of proof.
Note: The requirement that separately organized insurance branches operate
exclusively for the benefit of members of a fraternity operating under the lodge
system may be regarded as an exception to the “primary activities” test set forth
in GCM 38312, (March 20, 1980). See “Fraternal Activities and Benefits Must
be Primary” below for further discussion. Such insurance branches shouldn’t be
authorized to provide benefits to persons that aren’t members of a fraternity
operating under the lodge system. See GCM 35639.
A.5. Fraternal Activities and Benefits Must Be Primary
(1) A fraternal beneficiary society that is described in Section 501(c)(8) by virtue of
engaging in fraternal activities and providing for the payment of life, sick, or
accident benefits to its members may not then engage in unlimited nonfraternal activities or provide unlimited non-fraternal benefits and still maintain
its exempt status. The non-fraternal activities and non-fraternal benefits of a
fraternal beneficiary society will result in the organization’s loss of exempt
status unless the organization remains primarily engaged in fraternal activities
and its benefits are primarily fraternal benefits. Note that income from such nonfraternal activities and benefits may produce unrelated business taxable
income. See “Unrelated Business Taxable Income and Social Activities” below.
GCM 38312 indicates the following:
…A fraternal beneficiary society that is described in section
501(c)(8) by virtue of engaging in fraternal activities and
providing death benefits may not then engage in unlimited nonfraternal activities or provide unlimited non-fraternal benefits and
still maintain its exempt status. We conclude that the nonfraternal activities and non-fraternal benefits of a fraternal
beneficiary society will result in the organization’s loss of exempt
status unless the organization remains primarily engaged in
fraternal activities and its benefits are primarily fraternal
benefits…
…We believe that the exempt status of a fraternal beneficiary
society that has fraternal features and provides a death benefit
will be jeopardized if the organization engages primarily in nonfraternal activities and provides primarily benefits other than
fraternal benefits….
…In G.C.M. 34985, we concluded that an organization may
engage in some non-fraternal (in that case, political) activities
without losing its exempt status. We declined to state exactly
how much political activity a section 501(c)(8) fraternal
beneficiary society may engage in without jeopardy to its
exemption. We suggested that a fraternal beneficiary society
could retain its exempt status ‘so long as it is primarily engaged
19
in fraternal activities….’ We believe that such a standard is the
correct one. Accordingly, we believe that so long as the Lodge’s
activities are primarily fraternal, it should not be denied exempt
status under section 501(c)(8) on account of its non-fraternal
activities.
With respect to the payment of non-fraternal benefits by the
Lodge, we have never addressed the issue of whether an
otherwise qualified organization that provides both fraternal
benefits and benefits that are not fraternal benefits can qualify
under section 501(c)(8)…. We believe, however, that the
standard suggested in G.C.M. 34985 with regard to activities is
also an appropriate standard for benefits. Thus, we believe that a
fraternal beneficiary society that provides both fraternal and nonfraternal benefits may retain its exempt status so long as its
benefits are primarily fraternal benefits. We believe that applying
the standard suggested in G.C.M. 34985 to both an
organization’s activities and to the benefits it provides its
members will assure that the organization is one properly
described in section 501(c)(8)….
(2) Rev. Rul. 73-165, 1973-1 C.B. 224, discusses the necessary ratio of fraternal
activity to beneficial activity required of a Section 501(c)(8) organization, and
states that there is no requirement that either feature predominate so long as
both are present. However, an association whose fraternal features are so
insubstantial as to make it indistinguishable from an ordinary life insurance
company doesn’t qualify for exemption under Section 501(c)(8).
(3) Political activity isn’t considered a fraternal activity within the meaning of
Section 501(c)(8). But engaging in political activity doesn’t, in and of itself, give
rise to revocation of exemption. Therefore, a fraternal beneficiary society, so
long as it’s primarily engaged in fraternal activities and the provision of benefits
to its members and their dependents within the meaning of Section 501(c)(8),
may engage in some political activities, including intervention in political
campaigns on behalf of, or in opposition to, candidates for public office, without
jeopardizing its exempt status. See GCM 34985 (Aug. 10, 1972). Nevertheless,
the organization would be subject to tax on its political expenditures under
Section 527(f).
(4) Similarly, “union-like” activities that relate to the members’ working conditions
aren’t fraternal activities. See GCM 38312.
(5) McGlotten v. Connally, 338 F. Supp. 448 (D.D.C. 1972) involved a suit to enjoin
the Secretary of Treasury from granting tax benefits to fraternal and nonprofit
organizations which engaged in racially discriminatory membership practices.
The District Court, among other things, concluded that exemption from income
tax given to fraternal organizations, some of which exclude minorities from
membership, was sufficient government involvement to invoke the Fifth
20
Amendment. The court stated that by providing differential treatment to only
selected organizations, the government indicated approval of the organizations
and hence their discriminatory practice and aided that discrimination by
provision of federal tax benefits. The court further held that provision of a tax
deduction for charitable contributions was a grant of federal financial assistance
within the scope of the 1964 Civil Rights Act. Moreover, the court provided that
exemption from income tax for fraternal orders, which shielded from taxation not
only member-generated funds but passive investment income as well and
which was available only to particular groups, operated in fact as a subsidy in
favor of particular activities these groups were pursuing. As a result, the court
determined this fell within the 1964 Civil Rights Act.
(6) Footnote 7 to Stearns v. Veterans of Foreign Wars, 394 F. Supp. 138, 146
(D.D.C. 1975), aff’d, 527 F.2d 1387 (D.C. Cir. 1976) states, “Plaintiff relies on
McGlotten v. Connally, 338 F.Supp. 448 (D.D.C.1972) (three-judge court).
McGlotten is distinguishable because, inter alia, government involvement with
racial discrimination, as alleged in McGlotten, has apparently been treated more
strictly than other types of discriminations, see McGlotten, 338 F.Supp. at 459
n. 58; Spark v. Catholic University of America, 510 F.2d 1277 at 1282-1283
(D.C.Cir. 1975).”
B. Exemption Requirements Under Section 501(c)(10)
(1) Section 501(c)(10) was added to the Internal Revenue Code by the Tax Reform
Act of 1969, Pub. L. No. 91-172, section 121(b)(5)(A) (1969), 83 Stat. 487, 541.
Prior to that, there was no exemption provided for fraternal societies operating
under the lodge system that didn’t, in addition to their fraternal activities, also
provide for the payment of life, sick, accident and other benefits to their
members.
(2) The Senate Committee on Finance explained the purpose of Section 501(c)(10)
as follows:
[A] new category of exemption for fraternal beneficiary
associations is set forth which applies to fraternal organizations
operating under the lodge system where the fraternal activities
are exclusively religious, charitable, or educational in nature and
no insurance is provided for the members. The committee
believes that it is appropriate to provide a separate exempt
category for those fraternal beneficiary associations (such as the
Masons) which do not provide insurance for their members. This
more properly describes the different types of fraternal
associations.
See S. Rep. 91-552, S. Rep. No. 552, 91st Cong., 1st Sess. (1969).
21
(3) In its current form, Section 501(c)(10) describes domestic fraternal societies,
orders, or associations that:
a. Operate under the lodge system;
b. Devote their net earnings exclusively to religious, charitable, scientific,
literary, educational, and fraternal purposes; and;
c. Do not provide for the payment of life, sick, accident, or other benefits.
C. Comparison Between Organizations Exempt Under Section
501(c)(10) and Section 501(c)(8)
(1) Like the organizations described in Section 501(c)(8), organizations described
in Section 501(c)(10) are fraternal societies, orders, or associations operating
under the lodge system. The terms fraternal and operating under the lodge
system mean the same under Section 501(c)(10) as under Section 501(c)(8).
(2) Unlike organizations exempt under Section 501(c)(8), organizations exempt
under Section 501(c)(10) aren’t “beneficiary” societies; that is, they may not
provide for the payment of life, sick, accident, or other benefits to their
members.
(3) Any organization purporting to operate for the exclusive benefit of the members
of a Section 501(c)(10) organization, but that doesn’t itself conduct fraternal
activities or operate under the lodge system, wouldn’t qualify for exemption
under Section 501(c)(10). The Code provides exemption under Section
501(c)(8) for entities “operating…for the exclusive benefit of members of a
fraternity itself operating under the lodge system, and…providing for the
payment of life, sick, accident, or other benefits to the members of such
society…or their dependents.” Such organizations are understood to be
separately organized insurance branches of fraternal societies. Because
Section 501(c)(10) organizations are prohibited from providing insurance
benefits to their members, there’s no counterpart under Section 501(c)(10) for
the separately organized insurance branches found under Section 501(c)(8).
Section 501(c)(10) itself, however, doesn’t refer to organizations operated for
the exclusive benefit of other Section 501(c)(10) organizations.
(4) Rev. Rul. 81-117, 1981-1 C.B. 346, describes an organization operated for the
purpose of holding real estate and other property of all kinds for the use and
benefit of certain related fraternal societies. Each of the related societies is
described in Section 501(c)(10) and has representation on the corporation’s
board of trustees. The organization’s charter limits its membership to members
of the related fraternal societies. The organization doesn’t operate under the
lodge system. The ruling provides an organization that doesn’t 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, doesn’t qualify for
exemption from federal income tax under Section 501(c)(10).
22
(5) There are two additional requirements under Section 501(c)(10) not found
under Section 501(c)(8):
a. First, a Section 501(c)(10) organization must be “domestic”; that is, it must
be organized in the United States. See Section 7701(a)(4).
b. Second, the net earnings of a Section 501(c)(10) organization must be
devoted exclusively to religious, charitable, scientific, literary, educational,
and fraternal purposes.
D. Comparison Between Organizations Exempt Under Section
501(c)(10) and Section 501(c)(7)
(1) Section 501(c)(7) describes clubs organized for pleasure, recreation, and other
nonprofitable purposes. Such “social clubs” offer activities that are often similar
to the social activities conducted by fraternal beneficiary organizations. Social
clubs are distinguishable from Section 501(c)(10) organizations, however,
because they generally aren’t operated under the lodge system. Treas. Reg.
1.501(c)(10)-1 specifically excludes social clubs from exemption under Section
501(c)(10).
(2) Exemption under Section 501(c)(10) is considered more desirable than
exemption under Section 501(c)(7). For one reason, a Section 501(c)(10)
organization isn’t subject to the Section 501(c)(7) percentage limitations on
nonmember income and investment income. Another reason is that a Section
501(c)(10) organization isn’t subject to Section 512(a)(3) which applies special
rules on unrelated business taxable income for Section 501(c)(7) organizations.
(3) Although college fraternities often are operated under a lodge system, they are
specifically excluded by Treas. Reg. 1.501(c)(10)-1 from qualifying for
exemption under Section 501(c)(10). In Zeta Beta Tau Fraternity, Inc. v.
Commissioner, 87 T.C. 421 (1986), a Section 501(c)(7) local chapter of a
national fraternity sought exemption from tax on its investment income by
changing its classification to a fraternal society under Section 501(c)(10). The
predominant purpose of Zeta Beta Tau and its local chapters was to provide
housing, board, and social activities for its undergraduate student members.
The court provided that the possibility of using tax-free investment income for
recreational purposes would violate the congressional intention in framing
Section 501(c)(10) and that the regulation was a reasonable interpretation of
the statute. The court held that the organization, described under Section
501(c)(7), didn’t also qualify as a domestic fraternal organization under Section
501(c)(10). Therefore, the organization’s unrelated business taxable income
included income from investments under Section 512(a)(3)(A). See also GCM
37179 (June 24, 1977) and GCM 39378 (June 26, 1985).
23
III. Unrelated Business Taxable Income
(1) Fraternal organizations have traditionally engaged in social and recreational
activities in addition to their fraternal activities.
(2) Organizations described in Section 501(c)(8) and Section 501(c)(10) are
subject to tax on their unrelated business taxable income (UBTI) under Section
511.
a. Section 511 imposes a tax on unrelated business taxable income earned
by organizations described in Section 501(c).
b. Section 512 defines ways that unrelated business income is computed
and explains the exclusions and modifications that apply in determining
correct unrelated business taxable income.
c. Section 513(a) provides for specific exclusions when a trade or business
won’t be considered an unrelated business activity. These exclusions are:
(1) a trade or business in which substantially all the work in carrying on
such trade or business is performed for the organization without
compensation; (2) the trade or business is conducted primarily for the
convenience of members; (3) the trade or business involving selling
merchandise, substantially all of which was received by the organization
through gift or contribution.
d. Section 513(f) excepts certain bingo games from unrelated trade or
business treatment so long as the games aren’t carried out on a
commercial basis and don’t violate any state or local law.
(3) Treas. Reg. 1.513-1(a) states that, unless one of the specific exceptions of
Section 512 or 513 is applicable, gross income is includible in the computation
of unrelated business taxable income if:
(1) the income is from a trade or business;
(2) such trade or business is regularly carried on; and
(3) the conduct of such trade or business isn’t substantially related to the
organization’s performance of its exempt function.
A. Sale of Alcoholic Beverages
(1) The operation of a bar, restaurant, or general meeting hall is an accepted social
and recreational activity in which fraternal organizations may engage in. The
sale of alcoholic beverages to members for consumption on the premises is
considered to be related to the purposes of a fraternal organization. On the
other hand, the sale of alcoholic beverages to members for consumption off the
premises is generally considered to be unrelated trade or business activity
within the meaning of Section 513. See TAM 8641001 (June 5, 1986).
24
B. Participation of Nonmembers in Activities
(1) A fraternal organization may provide social and recreational activities to its
members. Guests of members may also participate in the organization’s
activities or make use of its facilities so long as the guest is being entertained
by the member. However, a nonmember isn’t being “entertained” merely
because he or she accompanies a member.
(2) When nonmember “guests” spend their own funds to participate in social and
recreational activities operated by fraternal organizations, they aren’t being
entertained by the member. If a nonmember incurs a charge to participate in a
social or recreational event or to make use of a social or recreational facility, the
nonmember is considered to be entertained by a member only if the member
pays the charge.
(3) When a fraternal organization allows or solicits nonmembers to make use of its
social and recreational facilities such as the operation of a bar and restaurant
open to the general public on a regular and continuous basis and the
nonmember pays for the costs of such recreation, the activity may result in
unrelated business taxable income. Providing recreational activities such as the
operation of a bar or restaurant to nonmembers directly where the nonmember
pays for the cost of the recreation doesn’t have a substantial causal relationship
to the exempt purpose of providing social and recreational activities to members
and may be considered unrelated trade or business if it’s a business regularly
carried on and no other exceptions to Sections 511 and 512 apply.
C. Gambling Activities
(1) Gambling, to the extent that fraternal members participate, is considered a
traditional exempt function of fraternal organizations. Rev. Rul. 69-68, 1969-1
C.B. 153, holds that gambling open only to members and their guests (even if
illegal) is a proper activity for social clubs exempt under Section 501(c)(7)
because it supplies pleasure and recreation to members and guests, even if it
has an additional purpose of raising money.
(2) However, when a nonmember gambles with their own money, the fraternal
organization is providing recreational activities directly to a nonmember rather
than as a service to members. When a fraternal organization provides
recreational activities, such as gambling, to nonmembers directly, those
activities don’t have a substantial causal relationship to the organization’s
exempt purpose of providing social and recreational activities to members. As a
result, the activity may be considered unrelated trade or business if it’s a
business regularly carried on and no other exceptions to Sections 511 and 512
apply.
(3) The Tax Court in Waco Lodge No. 166, Benev. & Protective Ord. of Elks v.
Comm’r, 42 T.C.M. (CCH) 1202 (T.C. 1981), aff’d, 696 F.2d 372 (5th Cir. 1983),
held that a Section 501(c)(8) organization’s income from operation of a weekly
bingo game constituted unrelated business taxable income under Section 511
25
and Section 513. The Service asserted that the gambling activities were open to
the public. The Tax Court provided that the organization’s bingo games were
illegal in Texas at the time the organization conducted bingo nights because
they fell within the definition of lottery as defined in 4 Tex. Penal Code Ann. tit.
10, sec. 47.01(6) (Vernon 1974). As the organization’s bingo games were illegal
under Texas law, the bingo games didn’t meet the “bingo exception” from
unrelated trade or business treatment under Section 513(f) and so, the bingo
games weren’t excluded from the Section 513(a) definition of unrelated trade or
business. The Tax Court also concluded that the bingo games didn’t meet the
exception from the definition of unrelated trade or business under Section
513(a)(1) because substantially all of the work performed in carrying on the
bingo games was compensated.
(4) GCM 39061 (Nov. 21, 1983) indicates the following:
… When guests spend their own funds to participate in gambling
activities operated by these organizations, they are not being
entertained by the members. A guest is only being entertained by a
member at a social or recreational activity or facility of the
organization for which there is a charge for such participation in the
activity or use by the guest if the member pays that charge. When
guests gamble with their own money, the organizations are
providing recreational activities in the form of gambling directly to
nonmembers rather than as a service to members. Providing
recreational activities such as gambling to nonmembers directly
rather than as a service to members does not have a substantial
causal relationship to the exempt purpose of providing social and
recreational activities to members and must as a result be
considered unrelated trade or business, as long as it is a business
regularly carried on and no other exceptions to sections 511 and
512 apply….
….Further, under the facts and circumstances of a particular case,
a certain gambling activity may essentially be a predominantly
public activity and only incidentally a member activity. For example,
a veterans organization…has a punchboard in a public tavern and
80 percent of the receipts from the punchboard come from
payments by nonmembers for gambling by nonmembers who are
not even participating as guests of members but are simply
members of the public. In that case, the entire activity including
participation by members would be considered unrelated trade or
business because the gambling is not being conducted primarily as
recreation for members.
Note: GCM 39061 mentions that under certain facts and circumstances of a
case, such as where 80% of the gaming receipts came from payments by
nonmembers (who aren’t guests of members), a gambling activity may be a
predominantly public activity and only incidentally a member activity. In that
26
situation, the entire activity, including participation by members, is considered
unrelated trade or business because the gambling isn’t being conducted
primarily as recreation for members. See also “Fraternal Activities and Benefits
Must Be Primary” above for a discussion on the potential impact of non-fraternal
activities on the tax-exempt status of a fraternal organization.
D. Rents from Real Property
(1) As a general rule, Section 512(b)(3)(A)(i) provides that all rents from real
property are excluded from unrelated trade or business. For example, Rev. Rul.
69-178, 1969-1 C.B. 158, provides that income derived by an exempt
organization for the occasional use of its meeting hall constitutes rents from real
property within the meaning of Section 512(b)(3) and, therefore, the rents are
excluded in determining unrelated business taxable income.
(2) However, Section 514 expands unrelated business income to include unrelated
debt-financed income from property in proportion to the debt acquired in
purchasing it. Property purchased with borrowed money and held to produce
income generally is called debt-financed property.
(3) In general, due to the provisions of Section 512(b)(4), Section 514 taxes income
that would otherwise be excluded from taxation under Sections 512(b)(1),
(b)(2), (b)(3), and (b)(5) (for example, dividends, interest, royalties, rents, and
certain gains or losses from the sale of property), but only if two conditions are
met:
(1) the income arises from property that’s acquired subject to a mortgage
or other similar lien (unless an exception to treatment as acquisition
indebtedness is met under Section 514(c)(2)(B)), and
(2) the production of income is unrelated to the purpose constituting the
basis of the organization’s tax exemption.
(4) Based on Section 514(b), rent from property acquired with acquisition
indebtedness as defined in Section 514(c) isn’t subject to unrelated business
income tax if substantially all of the use of the property is substantially related to
the organization’s exempt purposes.
(5) Specifically, Treas. Reg. 1.514(b)-1(b)(1)(i) provides that to the extent that the
use of any property is substantially related to the exercise or performance by an
organization of its charitable, educational, or other purpose or function
constituting its basis for exemption under Section 501, such property shall not
be treated as debt-financed property.
(6) Additionally, Treas. Reg. 1.514(b)-1(b)(1)(ii) provides that if substantially all of
any property is used in a manner described in Treas. Reg. 1.514(b)-1(b)(1)(i),
such property shall not be treated as debt-financed property. In general, the
preceding sentence will apply if 85% or more of the use of such property is
devoted to the organization’s exempt purpose. The extent to which property is
27
used for a particular purpose will be determined on the basis of all the facts and
circumstances. These may include (where appropriate):
a. A comparison of the portion of time such property is used for exempt
purposes with the total time such property is used,
b. A comparison of the portion of such property that is used for exempt
purposes with the portion of such property that is used for all purposes,
or
c. Both the comparisons described in (a) and (b).
D.1. Hall Rental and Catering
(1) Fraternal organizations commonly raise funds through hall rental and catering.
Although hall rental income received by exempt organizations is generally
excluded from unrelated business income tax by Section 512(b)(3), there are a
few exceptions.
When rents are derived from unrelated debt-financed property, a portion of such
rents, in an amount determined under Section 514(a), may be included under
Section 512(b)(4) as an item of gross income derived from an unrelated trade or
business.
In addition, payments for the use of rooms or other space are not rents from
real property, when services are also rendered to the occupant if the services
are primarily for the occupant’s convenience and aren’t usually rendered in
connection with the rental of rooms for occupancy only.
a. Treas. Reg. 1.512(b)-1(c)(5) states that payments for the use or
occupancy of rooms and other space where services are also rendered to
the occupant doesn’t constitute rents from real property. Generally,
services are considered rendered to the occupant if they are primarily for
their convenience and are other than those usually or customarily
rendered in connection with the rental of rooms or other space for
occupancy only. The supplying of maid service, for example, constitutes
such service, however, the furnishing of heat and light, the cleaning of
public entrances, exits, stairways, and lobbies, the collection of trash, etc.,
aren’t considered services rendered to the occupant. Payments for the
use or occupancy of entire private residences or living quarters in duplex
or multiple housing units, of offices in any office building, etc., are
generally treated as rent from real property.
b. Rev. Rul. 69-69, 1969-1 C.B. 159, describes an organization created for
the stimulation and fostering of public interest in the fine arts by promoting
art exhibits, sponsoring cultural events, conducting educational programs,
and disseminating information relative to the fine arts. Its activities are
carried on in a building that contains offices, galleries, music rooms, a
library, a dining hall, and studio apartments where artists may live and
work. The studio apartments are leased only to artists, a few of whom are
members of the organization. However, the apartments aren’t made
28
available to the tenants on the basis of membership in the club or any
criteria that would further the exempt purpose of the organization. The
organization provides maid and switchboard services for the tenants
similar to those provided to the occupants of rooms in hotels.
Rev. Rul. 69-69 holds that neither the leasing of the studio apartments nor
the operation of the dining hall by the organization has a substantial
causal relationship to the achievement of its exempt purposes. Because
substantial services are rendered to the tenants, the payments by the
tenants are not rents within the meaning of Treas. Reg. 1.512(b)-1(c)(2).
Thus, the leasing of the studio apartments and the operation of the dining
hall are unrelated trades or businesses under Section 513, and the
income from these activities is unrelated business taxable income under
Section 512.
c. Catering is a service primarily for the occupant’s convenience and not
usually rendered in connection with the rental of rooms for occupancy only
and, thus, is generally considered to be an unrelated trade or business
activity. However, the catering may be analyzed separately from the rental
of space if there is a separate charge paid in accordance with a separate
agreement between the parties. In addition, income from catering
incidental to the hall rental would be taxable as unrelated trade or
business income if substantially all the work in providing the catering
services is performed by compensated individuals and the catering is
regularly carried on. See TAM 9605001 (Oct. 9, 1995).
IV. Deductibility of Contributions
(1) Section 170(c)(4) provides that, in the case of a contribution or gift by any
individual, the term charitable contribution includes a contribution or gift to or for
the use of a domestic fraternal society, order, or association, operating under
the lodge system, but only 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.
(2) However, contributions for fraternal or social purposes are not deductible.
V. Filing Requirements
A. Annual Return or Notice
(1) Organizations that are tax-exempt under Section 501(c)(8) or Section
501(c)(10) are generally required to electronically file an annual Form 990series return or notice (that is, Form 990, Return of Organization Exempt From
Income Tax; Form 990-EZ, Short Form Return of Organization Exempt From
Income Tax; or 990-N, Electronic Notice (e-Postcard) for Tax-Exempt
Organizations Not Required to File Form 990 or Form 990EZ) to report certain
information required by Section 6033.
29
The organization’s gross receipts and its total assets determine which Form
990-series return it must file. See IRS.gov page “Form 990 Series - Which
Forms Do Exempt Organizations File - Filing Phase In” for a chart on gross
receipts and asset levels.
In general, Section 6033(a)(1) requires organizations exempt from taxation
under Section 501(a), which includes Section 501(c)(8) and Section 501(c)(10)
organizations, to file an annual return. Section 6033(a)(1) provides that every
organization (except for certain exceptions) exempt from tax under Section
501(a) will file an annual return, stating specifically the items of gross income,
receipts, and disbursements, and such other information.
(2) In determining whether the gross receipts of an organization reached the
threshold provided in Treas. Reg. 1.6033-2(g)(1)(iii) and Treas. Reg. 1.60332(g)(1)(viii), a local lodge may disregard insurance premiums received from
members in certain instances. Rev. Rul. 73-364, 1973-2 C.B. 393, holds that
the insurance premiums aren’t gross receipts of the local lodge where the
parent organization operates the insurance program, issues policies to the
individual members, and is required to report the collection of these premiums.
The local lodge merely collects the premiums and forwards the premiums to the
parent, without asserting any right to use them or otherwise deriving benefit
from their collection.
(3) Organizations with group rulings must follow certain return filing procedures.
For more information, visit IRS.gov page “Group Exemption Resources.”
A.1. Automatic Revocation
(1) Section 6033(j)(1) provides for the automatic revocation of exemption of any
organization that is required to file an annual return (Section 6033(a)(1)) or
notice (Section 6033(i)), but which fails to file an annual return or notice for
three consecutive years.
B. Unrelated Business Taxable Income
(1) Organizations with UBTI must electronically file Form 990-T, Exempt
Organization Business Income Tax Return, and electronically pay any required
periodic estimated tax payments.
C. Employment and Unemployment Tax
(1) Organizations with employees must file employment tax returns and
unemployment tax returns and electronically pay any required periodic tax
deposits. See Publication 15 (Circular E), Employer’s Tax Guide, for more
information.
30
VI. Application for Recognition of Exemption
(1) Organizations seeking recognition of tax exemption under Section 501(c)(8)
and Section 501(c)(10) are required to electronically submit the Form 1024,
Application for Recognition of Exemption Under Section 501(a) or Section 521,
including its Schedule E, with the correct user fee and all required supplemental
documents through Pay.gov. See Rev. Proc. 2023-5, updated annually.
(2) Proposed denials involving organizations seeking recognition of tax exemption
under Section 501(c)(8) and Section 501(c)(10) may be appealed.
Organizations described in Section 501(c)(8) and Section 501(c)(10) may also
institute a declaratory judgment proceeding in court in response to a denial
under the rules of Section 7428. See Sections 9 and 10 of Rev. Proc. 2023-5,
updated annually, and Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status.
VII. Examination Techniques
(1) The following sections provide examination techniques to assist in identifying
and developing issues commonly encountered during the examination of a
Section 501(c)(8) or Section 501(c)(10) organization. These guidelines aren’t
all-inclusive, and the intent isn’t to restrict the examiner in identifying issues or
using examination techniques not included herein.
A. Operating Under the Lodge System
(1) Review the parent organization’s organizing documents to determine if it has
rules governing subordinate lodges.
(2) Inspect the subordinate lodge’s charter to verify if it’s a parent organization’s
subordinate lodge.
(3) Review the minutes, correspondence files, and reports subordinate lodges
submit to the parent organization to verify that an active parent and subordinate
lodges exist.
Note: If the subordinate lodges aren’t required to submit activity and financial
reports to the parent organization, this may indicate the parent organization and
subordinate lodges aren’t operating under the lodge system. If the parent
organization and the subordinate lodges aren’t operated under the lodge
system, neither the parent organization nor the subordinate lodges may
continue to qualify for Section 501(c)(8) or Section 501(c)(10) exemption.
Consideration of potential revocation may be appropriate in such instances.
B. 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 primarily
individuals sharing the common bond.
31
(3) Analyze the membership records and the initiation and dues ledger accounts to
determine if more than one class of members exists. If more than one class of
members exists, identify the reasons for creating different classes, and
determine if creating different classes is 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 primarily nonfraternal in nature or there is no common bond among the members, the
organization may no longer continue to qualify for exemption under Section
501(c)(8) or Section 501(c)(10). Consideration of potential revocation may be
appropriate in such situations.
C. Payment of Benefits by Section 501(c)(8) Organizations
(1) Review the organizing documents, contracts, publications, and disbursement
records to determine:
a. The type of benefits
b. Eligibility requirements for the benefits
c. If non-beneficial membership classes exist
d. The non-beneficial membership classes’ purpose
e. The ratio of beneficial members to non-beneficial members
(2) The organization must offer benefits that are permissible under Section
501(c)(8) to members. If benefits not similar to life, sick or accident benefits are
offered, conduct in-depth research to determine the Service’s current position
on other benefits. If the number of non-beneficial members is large compared to
the number of beneficial members such that most of the members aren’t
entitled to receive benefits, the organization may not be exempt under Section
501(c)(8). See Polish Army Veterans Post 147 v. Comm’r, 24 T.C. 891 (1955),
vacated on other grounds sub nom. Polish Army Veterans v. Comm’r, 236 F.2d
509 (3d Cir. 1956), in which the Tax Court concluded that an organization didn’t
qualify for exemption under Section 501(c)(8) when approximately 90% of the
total membership of the organization wasn’t entitled to receive benefits from the
organization.
D. Unrelated Business Income
(1) Review sources of income reported on income statements or accounts
receivable files for sources of potential unrelated business income (UBI).
Frequently, fraternal organizations have UBI from:
a. Bar and restaurant sales to the general public
b. Rental income from debt-financed real property rented to nonmember
groups
32
c. Income from the rental of real property where services are rendered for
the occupants’ convenience
d. Gaming activities open to the public
e. Advertising in its publications
(2) If the unrelated business activities (those regularly carried on and no other
exceptions to Sections 511 and 512 apply) are the fraternal organization’s
primary activities, revocation of tax-exempt status may be appropriate.
(3) During the initial interview, in addition to asking general questions about the
organization’s sources of income and its books and records per IRM 4.75.11,
On-Site Audit Guidelines, ask questions about:
a. Renting the organization’s facilities to nonmember groups
b. Using nonmember groups’ facilities
c. Nonmembers participating in its social and gaming activities
d. Advertising in its publications
(4) If the fraternal organization’s restaurant, bar, or social activities are open to
nonmembers, follow the Audit Technique Guide (ATG) or (if available) the TG
covering social and recreational clubs under Section 501(c)(7) to determine
nonmember use and acceptable methods for allocating expenses to the
nonmember receipts.
Note: The ATG or (if available) the TG on social and recreational clubs under
Section 501(c)(7) used for determining nonmember receipts of a Section
501(c)(7) social club, for the most part, can also be used to determine the
nonmember receipts of fraternal organizations. However, keep in mind that
fraternal organizations aren’t subject to the record keeping requirements or
percentage limitations of Rev. Proc. 71-17, 1971-1 C.B. 683 (as changed by
Public Law 94-568 (S. Rep. No. 94-1318 2d Session, 1976-2 C.B. 597)).
E. Employment Taxes and Information Returns
(1) The most frequently encountered employment tax issues in a fraternal
organization audit involve wages paid to members who offer services to the
fraternal organization on a part-time, irregular basis. Some of the more common
services are:
a. Bartending
b. Maintenance
c. Bookkeeping
d. Facility improvements
e. Security
33
(2) During the initial interview, ask:
a. Who provides the services necessary to operate and maintain the
facilities? Address services such as managing the facilities, bartending,
cooking and maintenance.
b. Who keeps the books and records?
c. Does the organization have live entertainment at its meetings and social
functions? If so, have information returns, such as Forms 1099-MISC,
been filed and furnished for payments in excess of $600?
d. Does the organization pay cash or by check for the services?
e. If payments are in cash, how are they initially recorded?
f. If volunteers provide services, are they reimbursed for expenses incurred?
g. Are all payments for services properly reported on forms, such as:
• Form 940, Employer’s Annual Federal Unemployment
(FUTA) Tax Return
• Form 941, Employer’s Quarterly Federal Tax Return
• Form 944, Employer’s Annual Federal Tax Return
• Form W-2, Wage and Tax Statement
• Form 1099-MISC, Miscellaneous Income?
(3) Review the minutes, newsletters, flyers, advertisements, activity calendars,
reservation books, and contracts. Pay attention to special events that require
additional employees or independent contractors.
(4) Review the disbursements records and accounts payable files for payments to
individuals or for cash expenses.
(5) For additional guidance, refer to IRM 4.23.4, Employment Tax - General
Procedures and Workpapers, and IRM 4.23.8, Determining Employment Tax
Liability.
F. Related Entities
(1) Subordinate lodges frequently have related entities such as:
a. Title Holding Companies
b. Auxiliaries, usually women’s auxiliaries affiliated with a subordinate lodge
c. Corporations organized and operated to carry on the fraternal
organization’s social activities
(2) During the initial contact with the fraternal organization, determine if any related
entities exist. Determine the exempt status of the related entities.
a. Determine if the related entities must file information or tax returns
independently.
34
b. Inspect copies of any returns the related entities filed and determine
whether they warrant examination. If the fraternal organization doesn’t
have copies of the related entity’s return and the related entity is exempt,
ask for a Return Integrity & Compliance Services (RICS) return for
inspection.
c. When inspecting a related Section 501(c)(2) or Section 501(c)(25) titleholding organization’s return, be alert for social activities, food and
beverage sales, and similar activities being conducted by the title-holding
organization rather than the fraternal organization. If the title-holding
organization carries on the fraternal activities and the fraternal
organization doesn’t, pick up the title-holding organization’s returns for
examination, and consider revocation.
d. Most auxiliaries are separate entities exempt as organizations under
Section 501(c)(8) or Section 501(c)(10). In this case, determine whether
the auxiliary is fulfilling its filing requirements, and inspect its information
return. Occasionally an auxiliary is:
• Separately organized, but not exempt under Section 501(a) and not
filing the required tax returns. In this case, secure the delinquent
return.
• Not separately organized and an integral part of the subordinate
lodge, but its receipts aren’t being included on the subordinate lodge’s
Form 990-series. In this case, include the books and records of the
auxiliary in the subordinate lodge’s examination.
G. Separate Segregated Funds for Charitable Purposes
(1) Section 170(c)(4) allows an individual to deduct a contribution or gift to a
domestic fraternal organization if that contribution or gift is used for religious,
charitable, scientific, literary, or educational purposes or for preventing cruelty
to children or animals.
(2) In the initial interview, ask if the organization has a separate charitable fund.
(3) Review the organizational documents, minutes, correspondence, newsletters,
flyers, and receipts records to determine if the organization receives
contributions for charitable purposes. If the fraternal organization does receive
charitable contributions, verify that the receipts are kept in a separate fund and
disbursed only for religious, charitable, scientific, literary, or educational
purposes, or for preventing cruelty to children or animals.
35
VIII. References
A. EO CPE Texts
(1) 1980 EO CPE Topic H: Fraternal Beneficiary Societies and Fraternal Societies
(2) 1990 EO CPE Topic H: Nonmember Income of Social, Fraternal, Veterans, and
Social Welfare Organizations
(3) 2004 EO CPE Topic F: IRC 501(c)(8) Fraternal Beneficiary Societies and IRC
501(c)(10) Domestic Fraternal Societies
Note: Although the precedent cited in these CPE texts was current at the time
they were published, some of the references may now be outdated.
36
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.