Recordkeeping

Every organization must keep adequate records to establish liability for or exemption from taxes. Veterans’ organizations that are tax exempt need to maintain records to establish that their activities further exempt purposes. Some must maintain records regarding membership requirements. All veterans’ organizations must also keep records clearly identifying revenues from each source and expenses related to each source to determine whether any of the income is subject to UBIT. Recognized accounting methods must be used to provide the required information.

Each organization’s records must show that its purposes and activities continue to be appropriate for an exempt organization. Records must also be kept to establish liability for unrelated business income, employment tax or excise taxes on certain gambling income.

Every organization must maintain records of income from each source (related and unrelated) and the expenses attributable to each income source. This is required to substantiate its income and to determine what income, if any, is subject to tax. If applicable, it also must maintain records to determine if there is tip income, employment tax owed and income subject to wagering and other excise taxes. Records should be maintained to show income from veteran members and from nonmembers by activity or income source.

If records are not maintained to indicate income from members and nonmembers, or if records are inadequate, all income may be subject to UBIT, and tax exemption may be jeopardized.

General Recordkeeping Questions

What are the consequences of not maintaining adequate records?

Failure to maintain adequate books and records may result in a loss of tax-exempt status. The failure or inability to file the required information return or otherwise comply with the Tax Code is a failure to observe the conditions required for the continuation of exempt status.

Volunteers are used to conduct post fundraisers. However, the post pays employees for security and accounting. What records are required to show that these fundraisers are not subject to UBIT under the volunteer labor exception?

To establish that the fundraisers are conducted by substantially all volunteer labor, records should show the number of volunteers, the hours spent in planning and conducting the activity, and how many paid employees are used. If the paid employees are full-time employees, a reasonable allocation of time spent on the fundraising activity may be made. The post must maintain records of the income and expenses related to the fundraiser.

IRC 501(c)(19)

What records must be maintained to show the composition of membership?

A post must maintain a list of members and the category of membership (veteran, degree of relation or nonveteran or nonrelative). If a post receives deductible contributions, it must also maintain a list of members, their dates of service, whether they are war veterans as defined in 170(c)(3), and if not, whether they are spouses, widows, or widowers of war veterans, veterans or cadets.

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What records are required for auxiliary units regarding membership?

Auxiliary units must maintain a list of members and show their relation to the veteran post member. An auxiliary member must be related to the post member within two degrees of consanguinity.

Must a post maintain a record of activities and the number of members, auxiliary members, volunteers and employees involved in each activity?

Yes. A post should maintain records to indicate the nature of the monthly activities and to identify individuals participating in the activities (members, auxiliary, social members, youth groups). If the activity is a fundraiser, records should show who conducted the activity, and whether or not volunteers provided services. Records of activities can include post meeting minutes, historian’s records, activity books, commander’s books, house committee reports and reports to the parent organization. For those activities that are not related to exempt purposes because they are open to the general public, it is important to keep adequate records to establish how much of the income generated is from nonmember sources and subject to UBIT. If the post doesn’t keep adequate records of nonmember income, all the income from activities that are open to the public will be taxed as UBTI.

If the bar and restaurant are open to the general public, what records are required?

A post must maintain records of gross income and expenses from the bar and dining facility and any other income-producing activities. In cases where the facility or activity is open to the general public (such as bingo, pull-tabs, gaming devices and fundraisers, like shrimp dinners), the post must maintain a separate record of the gross receipts from members and from nonmembers to determine what amount of income is subject to UBIT. The post must also maintain records of who conducted the activity, whether compensation was paid, and the hours involved.

What records should be kept when joint fundraising activities are conducted with the auxiliary?

When an activity is conducted jointly, income and expenses may be allocated. Standard accounting methods may be used to determine a reasonable allocation method. If the activity is open to the general public, a separate record of the gross receipts from members and from nonmembers should be kept to determine what amount of income is subject to UBIT. Records of who conducted the activity, whether compensation was paid and the hours involved should also be maintained.

Example: A spaghetti dinner fundraiser is sponsored jointly by the post and the auxiliary. The income and expenses may be prorated based on the number of volunteers from each organization that were involved in conducting the activity.

Is an auxiliary supporting a specific post required to maintain separate records?

Yes. An auxiliary must maintain records to show that its activities and funds are used to support the post. Records should include not only the activity, but also how many members conducted or participated in the activity. If it is a fundraiser, records should show how many members conducted the activity, and whether the activity was conducted by volunteers.

What records must be kept to establish an insurance set-aside?

Amounts set aside for insurance payments are not subject to UBIT. A formal set-aside is not required. However, the organization must maintain adequate records describing the amount set aside and the use of the set-aside funds.

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IRC 501(c)(4)

What types of records must be maintained to show the composition of membership?

There is no membership requirement for exemption under IRC 501(c)(4). A post need only maintain a list of members and the category of membership (veteran, degree of relation, or nonveteran or nonrelative) for its own use and to verify dues income.

If a post qualifies under IRC 170(c)(3) to receive tax deductible contributions, it must maintain a list of members, their dates of service, whether they are war veterans, and if not, whether they are spouses, widows, or widowers of war veterans, veterans or cadets.

What types of records must be maintained when certain facilities and functions are open to the public?

The operation of recreational facilities, such as a bar and restaurant, is not considered an exempt activity under IRC 501(c)(4). Fundraisers, such as bingo and other types of gambling, are business activities that do not further social welfare purposes. The post must maintain records showing the extent of exempt activities as well as non-social welfare activities to establish that it is operated primarily for exempt purposes.

The post must also maintain books and records that are sufficient to establish the amount of gross income, the sources of gross income, expenses, deductions, credits and why the income would be excluded from UBIT, if applicable. The post should maintain records of who conducted the activity, whether compensation was paid and the hours involved.

Example: Bingo income is not subject to UBIT. Records on the gross revenue and expenses (including payouts) must be maintained. Separate ledgers must be maintained for income from the sale of pull-tabs, the operation of the bar and grill, and other activities not meeting any of the exceptions to UBIT.

IRC 501(c)(7)

What specific records should a 501(c)(7) organization maintain?

Records should be maintained to show the amounts and sources of gross income, whether the gross income is from members or nonmembers, and the expenses related to each source of gross income. This is required to determine the amount of member/nonmember income for exemption purposes as well as to determine what income is subject to UBIT.

What records must be maintained when nonmembers use the club’s facilities?

The club must maintain adequate records to substantiate the use of facilities by members, nonmembers and bona fide guests. A separate ledger should be kept for gross receipts from nonmembers.

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IRC 501(c)(8) and (10)

Must a fraternal beneficiary society maintain a list of members and their status?

Yes. Records should be maintained to show the number of members in each class. The organization must also be able to show the common bond between its members.

What records should be maintained to show that a fraternal beneficiary organization operates under the lodge system?

The parent organization must have an organizational document and bylaws permitting lodges and defining the common bond, purposes and rituals required under the lodge system. The subordinates must adhere to the requirements of the parent. Records such as organizational documents, minutes of meetings and records of actual activities may be used to show that an organization operates under the lodge system.

Should a fraternal beneficiary organization maintain a segregated fund for charitable purposes?

Yes. A segregated fund is recommended.

Should a fraternal beneficiary organization maintain records of its fraternal activities as well as income from insurance?

Yes. A record of activities is important to establish that the organization is more than just an insurance company. Appropriate records include minutes of meetings, flyers and advertisements of activities, and records of gross income and expenses attributable to activities and insurance.

What records should be maintained regarding life, sick, accident and other benefits provided to members and nonmembers?

An organization should maintain information regarding types of benefits offered, eligibility requirements for each benefit, the classes of members that may receive the benefit, the number of members and nonmembers in each class receiving the benefit, plus all income and expenses from the sale of policies if it is providing insurance. Nonmember income from the sale of insurance is taxable.

What records should be maintained when a fraternal beneficiary organization operates a bar or restaurant?

Records should be maintained to show whether the bar or restaurant is restricted to members and their bona fide guests, or whether it is open to the general public. Records should be maintained to indicate what income is from the members, what income is from the general public and what expenses are allocated to each source of income.

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