Rev. Rul. 84-48

1984-1 C.B. 133, 1984-14 I.R.B. 8.

                       Internal Revenue Service
                                 Revenue Ruling

     FRATERNAL BENEFICIARY SOCIETY;  LEGAL DEFENSE FUND FOR LAW ENFORCEMENT
                                    OFFICERS

                            Published: April 2, 1984

Section 446. - -General Rule For Methods Of Accounting, 26 CFR 1.446-1:  General rule for methods of accounting.

Section 451. - -General Rule For Taxable Year Of Inclusion, 26 CFR 1.451-1:  General rule for taxable year of inclusion.

Section 461. - -General Rule For Taxable Year of Deduction, 26 CFR 1.461-1:  General rule for taxable year of deduction.

Section 481. - -Adjustments Required By Changes In Method Of Accounting, 26 CFR 1.481-1:  Adjustments in general.

Section 501. - -Exemption From Tax on Corporations, Certain Trusts, Etc., 26 CFR 1.501(c)(8)-1:  Fraternal beneficiary societies.

  Fraternal beneficiary society;  legal defense fund for law enforcement officers.  A fraternal beneficiary society, composed of law enforcement officers and operating under the lodge system, that provides legal expenses to defend members accused of criminal, civil, or administrative misconduct arising in the course of their employment, provides "other benefits" within the meaning of section 501(c)(8) of the Code.

ISSUE

  Under the circumstances described below, does the maintenance of a legal defense fund by a fraternal beneficiary society, otherwise qualified for exemption from federal income tax under section 501(c)(8) of the Internal Revenue Code, constitute the provision of "other benefits" within the meaning of that section?

FACTS

  Local Lodge E is a subordinate of national fraternal beneficiary society P.  E is included in P's group exemption letter under section 501(c)(8) of the Code.  E is composed of law enforcement officers in a particular community.

  E maintains a legal defense fund that pays legal counsel reasonable fees to defend members of E who have been accused of criminal, civil, or administrative misconduct arising out of the course of their employment.  The fund is supported by members' dues.

LAW AND ANALYSIS

  Section 501(c)(8) of the Code provides for the exemption from federal income tax of fraternal beneficiary societies, orders, or associations that operate under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and that provide for the payment of life, sick, accident, or other benefits to the members of such societies or their dependents.

  The term "other benefits" as used in section 501(c)(8) of the Code, is limited by the type of benefit specified in that section. It is applicable only to those benefits which are of a like kind and nature to those enumerated.

  Historically, sick benefits have been understood to include benefits designed to compensate for loss of income during a period of illness, and accident benefits have been understood to encompass benefits payable due to a loss of earning power resulting from an injury.  See section 1.501(c)(9)-3(c) of the Income Tax Regulations.  For a benefit to be of a like kind and nature to sick or accident benefits and, therefore, to be included within the term "other benefits" under section 501(c)(8) of the Code, the benefit must be similar in nature to protection designed to compensate for expenses resulting from bodily injury or loss of earning power.  See section 1.509(c)(9)-3(d) of the regulations.

  E's payment of fees to legal counsel for defending members against criminal, civil, and administrative misconduct charges offers protection against the type of financial loss directly related to the loss of earning power.

  In the case of E's members, the imposition of penalties on those found guilty of misconduct arising out of acts performed during the course of their employment could include disciplinary action such as dismissal or suspension without pay.  Penalties could, therefore, result in loss of earning power to members.

HOLDING

  Under the circumstances described above, the maintenance of a legal defense fund by a fraternal beneficiary society, otherwise qualified for exemption from federal income tax under section 501(c)(8) of the Internal Revenue Code, constitutes the provision of "other benefits" within the meaning of that section.

Rev. Rul. 84-48, 1984-1 C.B. 133, 1984-14 I.R.B. 8.