IRC 501(c)(19)

Veterans’ Organizations IRC 501(c)(19) applies only to veterans’ organizations and their related auxiliaries. These organizations may conduct a broad range of activities without jeopardizing their tax-exempt status. Eligibility for membership in each post or subordinate unit is set forth in its governing documents, in other words, its constitution and bylaws. Section 501(c)(19) contains restrictions on membership makeup for veterans’ organizations seeking exemption from federal income tax.

This chapter provides answers to the questions most often asked regarding membership, exempt activities, auxiliaries and trusts/foundations.

Exemption Requirements

Most 501(c)(19) veterans’ organizations are part of a group exemption letter. This occurs when the IRS recognizes a group of organizations as tax-exempt because they are affiliated with a central organization. The central organization is the “head,” or main organization. The central organization generally supervises or controls many subordinate organizations, called posts. As part of the group exemption process, the subordinate posts adopt the central organization’s uniform governing instruments (constitution, bylaws, charter). The central organization’s governing instruments determine the membership requirements for each post. See Chapter 6 of this publication for additional information on group exemption letters.

Section 501(c)(19) provides for the exemption from federal income tax of a post or organization of past or present members of the United States Armed Forces if:

a. It is organized in the United States or any of its possessions;

b. At least 75 percent of its members are past or present members of the U.S. Armed Forces;

c. Substantially all its other members are individuals who are cadets or are spouses, widows,

widowers, ancestors or lineal descendants of past or present members of the U.S. Armed Forces or of cadets; and

d. No part of the net earnings of which inures to the benefit of any private shareholder or individual.

Membership Requirements

At least 75 percent of the members must be past or present members of the United States Armed Forces.

At least 97.5 percent must be:

a. Present or former members of the U.S. Armed Forces;

b. Cadets (including only students in college or university ROTC programs or at Armed Services

academies); or

c. Spouses, widows, widowers, ancestors or lineal descendants of individuals referred to in (a)

or (b).

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Membership Test Example 1: X is a national veterans’ organization that was issued a group exemption letter. X’s constitution and bylaws restrict membership solely to veterans of the U.S. Armed Forces. Post A is a subordinate organization included in X’s group exemption and has adopted governing documents identical to X’s.

Post A has 1,500 individuals who participate in the club’s bar and gaming activities. 1,200 are veteran members who are eligible for membership as described in the post’s constitution and bylaws. 300 are social nonmembers. Social nonmembers are not eligible for membership.

The veterans’ organization satisfies the section 501(c)(19) membership requirements because its members are all past or present members of the U.S. Armed Forces. The social nonmembers are treated as members of the general public for 501(c)(19) purposes. Income from nonmember sources may be subject to the unrelated business income tax.

Membership Test Example 2: X is a national veterans’ organization that was issued a group exemption letter. X’s constitution and bylaws do not restrict membership solely to veterans of the U.S. Armed Forces. Post A is a subordinate organization included in X’s group exemption ruling, and has adopted governing instruments identical to X’s.

Post A has 1,500 individuals who participate in the club’s bar and gaming activities. 1,200 are veteran members who are eligible for membership as described in the post’s constitution and bylaws. 300 are social members. The social members have a membership category established in post A’s governing instruments. The social members were not spouses, widows, widowers or lineal descendants of veterans. Because the social members exceed 2.5 percent of the post’s total membership, the organization cannot qualify for exemption under IRC 501(c)(19).

Who are considered past or present “members of the Armed Forces”?

Veterans are defined as present or former members of the United States Armed Forces. The term “military or naval forces of the United States” and the term “Armed Forces of the United States” each include all regular and reserve components of the uniformed services which are subject to the jurisdiction of the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy or the Secretary of the Air Force. Each term also includes the Coast Guard.

Members who are on active duty or are honorably separated from the National Guard and the Reserve Forces are also considered veterans.

Auxiliaries

Auxiliary units or societies are corporations or associations formed to support the purposes and activities of a post composed of veteran members. An auxiliary may be separately organized from the post after receiving a charter from their national parent organization. The posts that have a social facility will usually have a separately organized auxiliary with a separate employer identification number. Many central organizations have received a group ruling covering subordinate auxiliaries. Members of auxiliary units that are not separately organized are considered members of the post itself.

If the post is not exempt under IRC 501(c)(19), the auxiliary cannot qualify for tax exemption under IRC 501(c)(19).

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What are the exemption requirements for auxiliaries?

An auxiliary unit or society must:

a. Be affiliated with, and organized in accordance with, the bylaws and regulations of a veterans’

organization already exempt under IRC 501(c)(19);

b. Be organized in the United States or any of its possessions;

c. Have members that are either members of the 501(c)(19) organization, spouses of those

members, or related to those members within two degrees of consanguinity. This includes parents, grandparents, brothers, sisters and grandchildren, but does not include nieces or nephews of the member; and

d. No part of the net earnings may inure to the benefit of any private shareholder or individual.

Do auxiliaries have to be incorporated?

No. IRC 501(c)(19) requires that the unit or society be organized in the United States or any of its possessions. Auxiliaries may be organized as unincorporated associations or as corporations.

Can a youth organization sponsored by an exempt post and whose participants are all under the age of 18, qualify for exemption under IRC 501(c)(19)?

If the youth unit is a separate legal entity, meets the requirements for an auxiliary unit under the IRC and regulations, and submits an exemption application, it may qualify for recognition of exemption. If the unit does not meet the membership requirements for an auxiliary, it cannot qualify for exemption under IRC 501(c)(19) unless it is an organization of cadets. Youth units may qualify for exemption under other sections of the IRC.

May an auxiliary be recognized as tax exempt under an IRC section other than 501(c)(19)?

Yes. An auxiliary may qualify for recognition of exemption under IRC 501(c)(3), (4), (7), (8) or (10). A determination can be made only by considering all of the organization’s operations and activities.

Is there any action an auxiliary should take before applying for recognition of exemption?

Yes. An auxiliary should contact its central organization to determine if it has received a group ruling covering its subordinate auxiliaries. If the auxiliary has already been included in the group ruling or the central organization is willing to include it in the future, there may be no need for a separate application.

Trust or Foundation Issues

Congress originally enacted IRC 501(c)(19) to allow war veterans’ organizations to continue providing life, accident or health insurance benefits for their members and their members’ dependents. All 501(c)(19) organizations are now permitted to provide these benefits. Most veterans’ organizations do not provide these benefits directly; they contract out to existing public insurance companies. The administration of the insurance programs is often conducted by trusts or foundations created for this specific purpose. These organizations may also qualify for exemption under IRC 501(c)(19). Should a veterans’ organization wish to provide the insurance benefits directly, it may do so through the creation of insurance set-asides.

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What are the requirements for a trust or foundation to be exempt under IRC 501(c)(19)?

A trust or foundation must have a legal existence and be organized exclusively for IRC 501(c)(19) purposes. Its income must be used only to fund a veterans’ organization, the charitable purposes listed in IRC 170(c)(4) or for an insurance set-aside. If its funds are used for charitable purposes, the trust or foundation must provide in its organizing document that upon dissolution its funds will continue to be dedicated to charity. A trust or foundation cannot unreasonably accumulate income. Unless the trust or foundation is an insurance set-aside, a substantial portion of the income must actually be distributed each year.

What is an insurance set-aside?

A 501(c)(19) organization may create an insurance set-aside without creating a separate trust or foundation. A restricted fund can be created if adequate records are kept describing the amounts and designated purposes of the funds set aside.

Amounts paid by members for insurance benefits and set aside are not subject to tax as unrelated business income. To be considered set aside, the funds must be kept separate from the organization’s general funds and accounts. A set-aside is limited to amounts reasonably necessary to provide insurance benefits which are, in fact, provided, and must be used solely for paying those benefits to the members or for administering the insurance program. Excess trust funds from an experience gain may be used for IRC 170(c)(4) purposes or for the reasonable costs of distributing funds for such purposes.

Exempt Activities

501(c)(19) veterans’ organizations have been permitted broad purposes by Congress to include one or more of the eight purposes listed below. It is not necessary that the organizations’ purposes or activities include all the listed purposes to be exempt, but they cannot have purposes of a substantial nature that are not listed and retain 501(c)(19) status. The exempt purposes include:

a. Promoting the social welfare of the community as defined in Treas. Reg. 1.501(c)(4)–1(a)(2);

b. 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;

c. Providing entertainment, care and assistance to hospitalized veterans or members of the U.S.

Armed Forces;

d. Carrying on programs to perpetuate the memory of deceased veterans and members of the

Armed Forces, and to comfort their survivors;

e. Conducting programs for religious, charitable, scientific, literacy or educational purposes (as set

out in IRC 170(c)(4));

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

g. Providing insurance benefits for their members or dependents of their members, or both; or

h. Providing social and recreational activities for their members.

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Are the following activities consistent with the requirements for exemption?

a. Reviewing proposed legislation that may affect veterans, at both the federal and

state levels;

b. Testifying before a governmental body with respect to such legislation; and

c. Informing members about the proposed legislation.

Yes. Representing veterans before legislative bodies concerning legislation that affects veterans as a class has historically been a function of veterans’ organizations. These organizations are uniquely positioned to provide information about proposed legislation to both veterans and the legislature.

What types of activities would be considered promoting social welfare of the community for purposes of IRC 501(c)(19)?

Examples of some activities conducted by veterans’ organizations that are promoting social welfare include:

Example 1: Sponsoring youth activities whether or not the activity is limited to the members’ children. Buying equipment and uniforms for a youth athletic team is an appropriate post activity.

Example 2: Allowing other community organizations such as the Lions Club, a public school organization or a community group to use the post facility without charge.

Example 3: Sponsoring the Boy Scouts, Girl Scouts or other youth units of the post, and providing scholarships for students.

Example 4: Making donations to charities described in IRC 501(c)(3), such as hospitals, the Red Cross and the local Community Chest.

Example 5: Visiting sick or hospitalized members, veterans and their families.

When a post sponsors a youth group, must a supervising adult or youth leader be a member of the post?

No.

What types of social activities are appropriate for a 501(c)(19) organization?

Social and recreational activities are exempt activities if conducted among post members. Such activities may include:

n The operation of a bar and/or restaurant,

n Gambling, and

n Dinners and dances.

Is it appropriate for a post to sponsor joint social and recreational activities with its officially recognized auxiliary?

Yes. The auxiliary units and societies that have been recognized as tax exempt under IRC 501(c)(19) support the purposes and activities of the post. Including their members in the social and recreational activities of the post also furthers the purposes of the post.

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If each post member must sell10 tickets to a post’s weekly dance or dinner to non­ members, would the event be an exempt activity?

No. Recreational activities open to the general public do not further IRC 501(c)(19) purposes. When dinners or dances, coupled with other nonexempt activities, are the primary activities of the post, they adversely affect exemption. Income from activities open to the general public may be taxable.

Can the post operate bingo, pull-tabs and slot machines for its own members and guests without jeopardizing its tax-exempt status?

Yes. Gambling provides recreation for many people. If the gambling is limited to members of the post and their guests (guests must not only be invited by a member, but must have all their expenses paid by the member), it is an acceptable activity for a 501(c)(19) organization. If the gambling activity is open to the general public, the activity might jeopardize the organization’s exempt status or result in the income being taxable as unrelated business income.

[See Publication 3079, Tax-Exempt Organizations and Gaming.]

Can a post operate a bar or restaurant in its facility?

Yes. A bar and restaurant provide a setting for social and recreational activities permissible under IRC 501(c)(19). The use of a bar or restaurant must be limited to members of the organization and members of the auxiliary units and their guests (guests must be invited by the member and all expenses must be paid by the member). If these facilities are open to the general public, the income may be subject to tax and/or affect exempt status.

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