IRC 501(c)(8) and 501(c)(10) — 0418 Publ 3386 (PDF)

This chapter discusses fraternal beneficiary organizations recognized as tax exempt under IRC 501(c)(8) and 501(c)(10).

Exempt Status

To qualify for exemption under IRC 501(c)(8), an organization must:

a. Be fraternal in nature;

b. Operate under the lodge system; and

c. Provide for the payment of life, sick, accident or other benefits to its members.

An IRC 501(c)(8) organization may create a separate insurance subsidiary to provide benefits to its members. These subsidiary organizations may also qualify for exemption under IRC 501(c)(8).

A fraternal organization exempt under IRC 501(c)(10) is one that is described in IRC 501(c)(8) except that it does not provide benefits to its members. The net earnings of IRC 501(c)(10) organizations must be devoted to charitable, religious, scientific, literary, educational or fraternal purposes.

What does it mean to be fraternal in nature?

“Fraternal” means brotherly or friendly. The members of an IRC 501(c)(8) or IRC 501(c)(10) organization must share common ties and come together to pursue common goals. An organization whose members share nothing other than membership or a desire to participate in member benefits is not fraternal in nature and will not qualify for exemption. An organization whose members are mostly veterans who have joined together to pursue common goals is fraternal in nature.

Would an organization composed only of veterans of the United States Armed Forces qualify for exemption under IRC 501(c)(8) and 501(c)(10)?

Yes. Provided the organization satisfies the other requirements for exemption, the shared experience of serving in the Armed Forces is sufficient to establish that the members share a common bond.

Through shared activities in pursuit of these common goals, member friendships are strengthened and veterans as a class are strengthened.

What does “operating under the lodge system” mean?

Operating under the lodge system means carrying on activities under a form of organization that is comprised of local branches chartered by a parent organization. The local branches, called lodges or chapters, must be separately organized and self-governing but operated under the general control and supervision of the parent lodge and subject to its rules, laws and edicts. Both the parent and local organizations must be active. This means that each organization holds regular meetings at a designated place, adopts a representative form of government and performs its work according to a set ritual.

What types of benefits must an IRC 501(c)(8) organization provide?

To qualify for exemption, an IRC 501(c)(8) organization must offer some type of insurance benefits.

Life insurance, accidental death and dismemberment insurance, and health insurance are some types of appropriate benefits. Benefits need not be limited to insuring members against personal risk, but may also include insurance against property loss. An organization is not required to offer all types of insurance benefits.

Must every member of an IRC 501(c)(8) organization subscribe to the benefits offered?

No. It is not required that all members be covered by the benefits program or that all eligible members purchase policies for the benefits offered. Organizations may have two classes of members (beneficial and non-beneficial). Most of the members must, however, be entitled to participate in the benefits program.

Can an organization formed to provide life, sick, accident or other benefits to its members who are veterans qualify for exemption under IRC 501(c)(8)?

An organization formed to provide benefits to its members will qualify for exemption if it is fraternal in nature and operated under the lodge system. It is not necessary that any one feature predominate; however, all features must be present.

May an IRC 501(c)(10) organization whose members are veterans spend its net earnings solely for the operation of a bar, grill and casino for members of the lodge?

Yes. Fraternal activities include social and recreational activities for members of the lodge. IRC 501(c)(10) permits a lodge to use its net earnings for fraternal and charitable purposes but does not require that a lodge use any of its funds for charity. Opening these activities to nonmembers may, if extensive, jeopardize exemption or cause the income to be taxed as UBIT.

Exempt Activities

What types of activities are permissible?

Veterans’ organizations exempt under IRC 501(c)(8) and IRC 501(c)(10) may conduct a wide array of activities. These activities are often the same as those conducted by IRC 501(c)(19) organizations and may include:

a. Promoting the social welfare of the community;

b. Assisting needy and disabled veterans, widows or orphans of deceased veterans;

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

Forces of the United States;

d. Perpetuating the memory of veterans and comforting their survivors;

e. Conducting programs for religious, charitable, scientific, literary or educational purposes;

f. Sponsoring or participating in patriotic activities;

g. Providing social and recreational activities for members; and

h. If exempt under IRC 501(c)(8), providing insurance benefits to members.

May a fraternal organization provide assistance to its own members who are sick and disabled or provide aid to their families without adversely affecting its tax-exempt status?

Yes. Assisting sick and disabled members is a beneficial fraternal activity. Providing assistance to members when it is needed improves conditions for a class of persons who are engaged in a common pursuit, and tends to unite them by creating a stronger bond of sympathy and interest.

May a fraternal organization operate an orphanage for children of its members and their families or a home for elderly members?

Yes. These are traditional fraternal activities that strengthen the common bond among members.

Will providing educational loans and scholarships for members and their families jeopardize exemption?

No. The provision of loans and scholarships to members and their families is a fraternal benefit and strengthens the common bond between members.

May fraternal organizations operate a bar or restaurant for its members and their bona fide guests?

Yes. Operating such facilities for members is a fraternal activity and will not jeopardize exemption under IRC 501(c)(8) or IRC 501(c)(10). Allowing nonmember use may result in the income from nonmembers being taxable as unrelated business taxable income.

It is the responsibility of the exempt organization to demonstrate that a nonmember is a bona fide guest so that the income is not taxable. The organization should maintain adequate books and records to identify members and their bona fide guests and distinguish them from nonmembers.

Who is a bona fide guest?

A bona fide guest is one invited to participate in an activitiy and whose expenses are paid by the member. If the guest pays for his own recreation or food, the guest is not a bona fide guest.

May fraternal organizations receive substantial investment income without adversely affecting exemption?

Yes. There are no income limits. Keep in mind that IRC 501(c)(10) organizations must spend their net earnings solely for charitable and fraternal purposes.

May fraternal organizations rent facilities to nonmembers without adversely affecting exempt status?

Use of the lodge facilities by nonmembers does not further the exempt purposes of the lodge. This includes rental of banquet rooms and purchase of catering services for private parties as well as use of the bar and restaurant by nonmembers. The income generated by such activities is generally subject to UBIT.

Does an IRC 501(c)(8) organization jeopardize its exempt status if it continues to collect premiums on insurance policies sold to members who have been expelled, suspended or have withdrawn?

No. An owner of an insurance policy has the right to keep the policy in effect. This right is not affected by expulsion, suspension or withdrawal from the sponsoring organization.

Does an IRC 501(c)(8) organization jeopardize its exempt status if it contracts to sell additional insurance to individuals who are no longer members because they have been expelled, suspended or have withdrawn, or to nonmembers?

The sale of additional insurance policies to terminated members or to nonmembers is not an exempt activity for an IRC 501(c)(8) organization. The income generated by sales of policies to nonmembers is subject to UBIT. If the sale of insurance to nonmembers is substantial, the IRS may question whether the organization is an insurance company and no longer exempt under IRC 501(c)(8).