From a federal tax perspective, what characteristic do the following organizations share: The Elks Lodge, the Moose Lodge, the Knights of Columbus, the Order of the Eastern Star, the Freemasons, and the Shriners? They are all “fraternal societies” under Internal Revenue Code (IRC) sections 501(c)(8) and 501(c)(10). These organizations are therefore tax-exempt, although unlike Section 501(c)(3) organizations, they are not qualified to receive tax-deductible contributions unless such contributions are to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. Members of the societies are bound by common unifying objectives beyond purely social dimensions. As additional features, 501(c)(8)s provide valuable insurance benefits, and 501(c)(10)s provide charitable benefits for millions of people.
Fraternal societies have long been a part of the fabric of American culture. They reportedly have their “roots in the British friendly societies. The friendly societies, in turn, were extensions of the medieval guilds, and ultimately of the burial societies of antiquity.”1 In 1868, John Upchurch founded the Ancient Order of United Workmen, the first fraternal benefit society. Since that time fraternal societies have grown to become important contributors to the well-being of the communities they serve. According to the National Center for Charitable Statistics, the largest fraternal benefit societies report revenues in excess of several billion dollars annually.2
501(c)(8) and 501(c)(10) Distinctions and Qualifications
Under the Internal Revenue Code, fraternal societies fall into one of two categories: fraternal benefit societies under section 501(c)(8), which are those that provide benefits, such as life, sick, or accident benefits; and domestic fraternal societiesunder section 501(c)(10), which are those that do not provide benefits but donate their proceeds to charity. Domestic fraternal societies are generally smaller, since they do not maintain substantive benefits programs. Still, domestic fraternal societies often have extensive charitable operations, with operating budgets in excess of $10 million annually.
To qualify as a 501(c)(8) fraternal benefit society, an organization must:
- Have a fraternal purpose. This means membership must be based on a common tie or the pursuit of a common object. The organization must have a substantial program of fraternal activities, which cannot be simply social activities. Such purposes are deemed “fraternal” because of the feelings of commonality pursuing the joint purpose often creates. As one court put it, “The term ‘fraternal’ can properly be applied to such an association for the reason that the pursuit of a common object…usually has a tendency to create a brotherly feeling among those who are thus engaged.”3 While a 501(c)(8) may engage in political activities, such political activities are not considered fraternal and may not be the primary activity of the organization.
- Operate under the lodge system. The lodge system requires two entities: a parent, and one or more subordinate organizations, each of which is largely self governing and called a “lodge.” An organization operates under the lodge system if it is “carrying out its activities under a form of organization that comprises local branches called lodges, chapters, and the like."4
- Provide for the payment of life, sick, accident, or other benefits. All members of the lodge system will ordinarily be eligible for benefits, though an association may establish reasonable criteria for excluding some members. Notably, the fraternal activities of a 501(c)(8) need not predominate over the benefit-providing activities of the organization.
Separately-organized insurance corporations that operate exclusively for the benefit of 501(c)(8) fraternal benefit societies also qualify for exemption under 501(c)(8), even if they do not operate under the lodge system. Many of the largest 501(c)(8) exempt organizations are such separately-organized insurance corporations.
To qualify as a 501(c)(10) domestic fraternal society, the first two criteria for 501(c)(8) organizations are exactly the same. But whereas a c(8) must provide benefits for its members, a c(10) may not provide benefits for its members. Instead, the c(10) must devote all its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes. As a “domestic” fraternal society, a c(10) must also be organized in the United States.
All of the above qualifications must be met for exemption. For example, the IRS has denied exemption to an organization whose stated purposes were to “spread friendship and fraternity in the club; to aid the membership in the event of illness, personal injury, or accident; to pay benefits to sick members; in the event of death, to pay a death benefit to whomever the member shall have designated; and to develop patriotism among the membership.” The IRS determined that because the organization was not operated under the lodge system, it did not qualify for exemption.