IRC 501(c)(4) Social Welfare — 0418 Publ 3386 (PDF)

Prior to the enactment of IRC 501(c)(19), veterans’ organizations were generally recognized as tax exempt under IRC 501(c)(4) because their primary activities promoted the social welfare of the community. There are no membership requirements under IRC 501(c)(4). Exemption is based solely on the type of activities conducted. Contributions to an IRC 501(c)(4) organization are generally not tax deductible. [See Chapter 8 on Contributions.] This Chapter answers frequently asked questions about tax-exempt status under IRC 501(c)(4).

Exempt Status

An IRC 501(c)(4) veterans’ organization must be organized as a not-for-profit organization and operated exclusively for social welfare purposes. Its primary activities must promote the common good and general welfare of the people of the community. Social welfare activities do not include social, political or business activities. The net earnings of an IRC 501(c)(4) organization may not be used for private purposes or to benefit private individuals (inurement).

Should an IRC 501(c)(4) veterans’ organization ask to be reclassified under IRC 501(c)(19)?

An organization that satisfies the membership requirements under IRC 501(c)(19) should consider asking to be classified under that section since it permits a broader range of activities. For example, operating a bar and dining facility for members are activities that do not directly promote the social welfare of the community because they are social and recreational in nature but are permissible activities under IRC 501(c)(19). An organization that does not engage in social activities need not seek a reclassification. An organization is well advised to consider the extent of its social and business activities when initially applying for tax exemption.

Will adding a new category of members (social or friends of the post) adversely affect exemption?

No. Generally, the number or type of members will not affect exemption under IRC 501(c)(4). Exemption under IRC 501(c)(4) is based solely on the type of activities conducted. Membership requirements can be set by the post or its central organization and include any category of members that is allowed by its charter.

May a central veterans’ organization exempt under IRC 501(c)(19) have subordinate posts exempt under IRC 501(c)(4)?

Yes, and vice versa. All subordinates under a group ruling, however, must be exempt under the same IRC section. For example, the parent may be exempt under IRC 501(c)(4) and list all of its IRC 501(c)(19) subordinate posts on its group ruling. The group ruling may not include subordinate organizations exempt under any other section. These organizations may apply for tax exemption on their own.

May a central veterans’ organization have subordinates that are not tax exempt?

Yes.

May an auxiliary unit be exempt under IRC 501(c)(19) if it supports a post that is exempt under IRC 501(c)(4)?

No. IRC 501(c)(19) provides exemption only for auxiliary units that support IRC 501(c)(19) posts. Auxiliary units supporting an IRC 501(c)(4) post may qualify for exemption under IRC 501(c)(4) by engaging primarily in activities that directly promote the social welfare of the people of the community.

Exempt Activities

What types of activities are appropriate under IRC 501(c)(4)?

Social welfare activities include promoting, sponsoring and participating in patriotic activities such as Fourth of July parades, school Flag Day ceremonies and Junior ROTC groups. Assisting needy and disabled veterans, widows or orphans of deceased veterans, as well as conducting hospital visits, driving the sick and disabled to the hospital or to medical facilities, recycling, adopting a road for clean up purposes and sponsoring a youth baseball team, or other youth groups, are also social welfare activities. The social welfare activities listed above are not exclusive.

Social welfare activities do not include social, business or political activities.

Is operating a bar, restaurant or game room for members an exempt activity?

No. Operating a bar, restaurant or game room is not a social welfare purpose. These activities are social and recreational and may be considered business activities. They do not benefit the community as a whole. If activities that do not further social welfare become an organization’s primary activities, they may jeopardize tax exemption.

If a post has “bar and grill members” who are not veterans, would the bar and grill operation have an adverse impact on exempt status?

Membership is not a factor under IRC 501(c)(4). The operation of the bar is a business activity. The income from this activity may be subject to the tax on unrelated business income. If this activity is the primary activity, the organization will not qualify for exemption under IRC 501(c)(4).

If each post member sells 10 tickets to a weekly dance or dinner, would the dance or dinner be an exempt activity?

No. Social dinners and dances, whether limited to members or open to the public for a fee, are not exempt activities under IRC 501(c)(4). These activities will preclude exemption if they are the post’s primary activities. The income may also be taxable.

Must participants in post-sponsored activities, such as a post baseball team, be members of the post?

No. There is no requirement that only members of a post participate in a post-sponsored activity as long as the activity promotes social welfare. The main issue is whether the activity is one that is appropriate for an organization described in IRC 501(c)(4).

Example: Sponsoring an adult recreational baseball team open to the community and on which some of the post members play would further the exempt purposes of an IRC 501(c)(4) post. So would sponsoring a 4th of July parade for the benefit of the community.

Is there any difference in the IRS treatment of the following youth programs sponsored by a national IRC 501(c)(4) veterans’ organization and/or its posts: (A) post baseball teams, (B) Boys’ and Girls’ State and Nation, and (C) youth units?

No. Providing educational and recreational activities for youth are permissible social welfare activities.

Would allowing other organizations, such as school organizations or community groups, to use the post facility without charge be an exempt activity?

Yes. Providing the use of the facility without charge or for actual cost to other community organizations would be a social welfare activity. Charging commercial rents or providing commercial services, such as food and beverage service, might result in the income being subject to the UBIT.

Is the operation of a thrift store an exempt activity?

No. This would be an unrelated activity and subject to UBIT unless it meets one of the UBIT exceptions such as volunteer labor or donated merchandise. If operating a thrift shop is an organization’s primary activity, it will not qualify for exemption under IRC 501(c)(4).

Is reviewing proposed legislation that may affect veterans, at both the federal and state levels, and testifying before a governmental body as to the legislation and also informing members about the proposed legislation an exempt activity under IRC 501(c)(4)?

Yes. Representing veterans before legislative bodies concerning legislation that affects veterans as a class is considered a social welfare activity under IRC 501(c)(4).

May an IRC 501(c)(4) veterans’ organization rate candidates for public office and inform its members as to how the candidates voted on veterans’ issues?

Rating candidates in this manner is participating in a political campaign on behalf of or in opposition to a political candidate. This type of political activity does not promote social welfare. An IRC 501(c)(4) organization may engage in political activity so long as, when coupled with any other nonexempt activities, it is not the organization’s primary activity.

If the organization does intervene in a political campaign, certain political expenditures may be taxable.

May an IRC 501(c)(4) veterans’ organization encourage greater participation in governmental and political affairs by its members?

Yes. For example, developing and distributing educational material designed to create greater interest in government and politics and conducting workshops and seminars on the technical aspects of the political system are permissible activities. Promoting fair campaign practices through nonpartisan analysis, study or research and making the results available to the public is also promoting social welfare.

Will receiving substantial funding from bingo games open to the general public adversely affect exemption under IRC 501(c)(4)?

Sponsoring bingo games open to the general public is a commercial activity and does not promote social welfare. However, an organization whose primary activities do promote social welfare may sponsor bingo games, or other charitable gaming, as a way of raising funds. The IRS will look at all the facts and circumstances when determining what activities are primary. The amount of support raised from an activity is not the only factor considered. [See Publication 3079 for additional information regarding gambling.]

What can an IRC 501(c)(4) veterans’ organization do to show that its primary activities promote social welfare?

The best way to establish an organization’s primary activities is through its books and records. Keep adequate records of each activity. Recording the amount of time, money and manpower spent in each activity, including fund-raising activities, will help the organization and the IRS identify the organization’s primary activities.

IRC 501(c)(4) exemption is based on activity, not membership.