Board of Directors

  •  
  • blank

    A Report on the Society's Tax Status


    Last winter, a document was circulated to the Board and Members of the Society which questioned our tax-exempt status. This document was written by Lisa Steele, a tax attorney who is also a SCA participant, at the request of Mark Schuldenfrei, also a participant. This document spurred the Board to contact a well- respected California law firm (Silk, Adler & Colvin) which specializes in non-profit law. Rosemary Fei, who is their specialist in non-profit tax law, prepared the following response.

    Please note that the preparation of this document was not donated to the Society, and it was not cheap. (The standard rate for attorney time is approximately $200/hour.) If you have any questions about the contents of this document, please do not contact the attorneys. Write to the Board at the Milpitas office or at directors@sca.org and we will try our best to either answer your questions or obtain answers from the appropriate parties.

    Please note further that the footnotes were typed into the body of the document ((within double parentheses)) by myself. I assume all blame for any errors in transcription -- but I did double-proof them.

    This document is the property of The Society for Creative Anachronism, Incorporated. and of its authors. Members of the Society for Creative Anachronism may copy and distribute this document to other members of the Society so long as proper credit is given and no changes are made in the text. The governing version of this document is the original, which is held at the SCA Corporate Office in Milpitas. If you wish a copy of the original document, please write to the office.

    --- Lee Forgue, Director, for the SCA Inc.

    MEMORANDUM
    
    TO:       Board of Directors
              Society for Creative Anachronism, Incorporated
    
    FROM:     Rosemary E. Fei
    
    DATE:     May 8, 1996
    
    RE:       Allegations of Violations of Tax-Exempt Status
    Requirements
    
              Some members of Society for Creative Anachronism,
    Incorporated (the "Society"), have expressed concerns over the
    Society's operations, alleging that the Society is in danger of
    losing its tax-exempt status.  We are a law firm exclusively
    engaged in representing tax-exempt and nonprofit organizations,
    and advise extensively on tax-exemption compliance issues.  In
    January and February, 1996, we conducted a brief preliminary
    investigation ((The brevity of our review was dictated by the
    Board's desire to determine the seriousness of the allegations
    before expending potentially very substantial legal fees for an
    in-depth review of the numerous, complex, and widespread
    activities of the Society.  Based on this initial review, while
    we recommend some areas for remediation, we do not believe a
    full-scale tax compliance audit is warranted at this time.)),
    including review of the documents listed in Exhibit A, in light
    of these allegations, and this memorandum presents our results
    and conclusions.
    
    Summary
    
              While our investigation revealed some areas of
    corporate and tax law compliance which may require further review
    and to which the Board should attend in the future, these were
    not serious enough to be grounds for revocation of the Society's
    exempt status, and we found no reason to believe the Society is
    materially out of compliance with its tax exemption.  A more in-
    depth investigation could, of course, reveal a different picture,
    but the Board will have to balance the costs of undertaking such
    a process against its likely value to the Society and the
    charitable and educational uses to which the Society's assets
    might otherwise be put.
    
              The members' concerns appear to be unwarranted, arising
    from an overly strict reading of applicable tax statutes,
    regulations, and cases.
    
    Background
    
              The Society was incorporated in 1968.  In 1971, the IRS
    determined the organization to be exempt from taxation under IRC
    501(c)(3).  Because regulations under Code Section 509 were at
    that time in the process of promulgation, the organization did
    not receive its public charity status under Code Section
    509(a)(2) until 1972.  The IRS issued a "no change" letter to the
    organization in 1978, and in 1989 issued a letter confirming the
    Society's public charity status.  In 1990,  the IRS conducted an
    audit and concluded that no change in the Society's exempt status
    was in order.
    
              In 1989, the Society amended its Articles of
    Incorporation.  Its specific purposes are, according to the
    amended articles (Article II):
    
         a)   Research and education in the field of pre-17th
              Century Western Culture.
    
         b)   Generally, to engage in research; publish material
              of relevance and interest to the field of pre-17th
              Century Western Culture; to present activities and
              events which re-create the environment of said
              era, such as, but not limited to, tournaments,
              jousts, fairs, dances, classes, et cetera; to
              acquire authentic or reproduced replicas of
              chattels representative of said era; and to
              collect a library.
    
              According to the Bylaws (Article III), "[t]he Society
    shall be dedicated primarily to the promotion of research and re-
    creation in the field of pre-17th century Western culture . . .
    ."
    
              The Society operates on a multinational scale with
    members in the United States, Canada, Australia, several
    countries in Europe, and U.S. armed forces bases around the
    world.  A Board of Directors takes responsibility for the entire
    organization which is divided into regions (Kingdoms), which are
    further divided into local units.  The Society sponsors a wide
    variety of "events" including tournaments, feasts, and other
    similar gatherings where members display the results of their
    researches into period culture and technology in an environment
    which evokes the atmosphere of the Middle Ages and Renaissance,
    as well as conducting more traditional educational activities
    such as classes, seminars, workshops, and meetings.
    
    Analysis of Allegations
    
              The allegations made by concerned members can be
    categorized into four areas:  (1) errors by the Society in filing
    reports and maintaining corporate records; (2) the Society's
    receipt of unrelated business income which is subject to tax and
    for which reports have not been filed nor taxes paid; (3) private
    inurement of Society assets to benefit insiders; and (4) the
    existence of a substantial nonexempt purpose in the form of
    social activity at Society events.  Each of these allegations is
    addressed in turn below.
    
              Reports and record keeping.  The Society is required to
    file Form 990, as well as employment tax filings, with the
    Internal Revenue Service ("IRS") annually.  In addition to
    filings with the IRS, the Society must make similar filings with
    the California equivalent of the IRS, the Franchise Tax Board, or
    FTB, on Form 199.  To maintain its corporate status in good
    standing, the Society must file annually a one-page statement
    with the Secretary of State listing its current officers. 
    Finally, the Society must file Form CT-2 with the Registry of
    Charitable Trusts in the Attorney General's office, concerning
    its assets, which are held in charitable trust.  With the
    exception of the Society's 1993 Form 990 and Form 990-T, we have
    not reviewed the Society's tax or corporate filings.  We have
    been informed by corporate officers that each of the filings
    listed above has been made as required. We have not, of course,
    audited the content of each filing, but we presume the Society's
    auditors have done such due diligence in preparing these filings
    as they deemed required by their profession.  The members allege
    possible filing irregularities with the IRS such as incomplete
    forms or unsigned forms, not reporting bylaw amendments to the
    IRS, and "a history of incomplete CT-2 reports with the State of
    California."  We cannot verify or deny these allegations based on
    our review.  More seriously, the members imply that the Society
    fraudulently underreported its total income as $40,000 on its
    1993 Form 990.  Our review showed that the Society actually
    reported total income of $2,503,105.
    
              Failure to adhere to filing requirements could result
    in penalties being imposed on the Society; in some cases, these
    penalties can be substantial.  However, in our experience, such
    penalties are typically waived by regulators if the organization
    can demonstrate that its failure was due to reasonable causes and
    not the result of willful neglect.  Inadvertent failures to file
    reports or mistakes in filings are not grounds for revocation of
    exempt status.  The Society would have to ignore numerous notices
    from regulators and refuse to make required filings before
    revocation of tax-exempt status would become an issue.  The Board
    is responsible for seeing that appropriate personnel, outside
    consultants, and procedures are in place so as to ensure that
    required filings are made accurately and on time.
    
              Other than the corporation's Amended Articles of
    Incorporation, Bylaws, and 1995 Organizational Handbook, we have
    not reviewed the Society's internal governance, membership,
    financial, contractual, or other records.  If the Board deems it
    appropriate, we would be happy to undertake such a review; with
    respect to certain types of records, such an undertaking is more
    efficiently performed by independent CPA auditors than attorneys,
    should the Board feel it is needed.  
    
              Unrelated business income taxes.  The members allege
    the Society may be underreporting its unrelated business income,
    and therefore also failing to pay taxes due on such income. 
    Specifically, the concern relates to advertising income received
    by the Society for advertisements placed in Society publications.
    
              The Code does not prohibit a charity such as the
    Society from engaging in, and earning income from, activities
    outside its exempt purposes; however, the law does impose a tax
    on any net income from such unrelated activities. ((Code Sections
    501(b) and 511.))  To be subject to tax, the activity must (1)
    constitute a trade or business (meaning any activity usually
    carried on for profit), (2) be regularly carried on, and (3) not
    directly further the organization's charitable mission.  Unless
    an activity satisfies all three of these requirements, it will
    not be subject to tax.  Even if it does meet these requirements,
    the unrelated business income tax provisions include numerous
    exceptions, so that a great deal of unrelated business activity
    escapes taxation.
    
              Aside from the payment of taxes, if an exempt
    organization has too much unrelated activity, it may be deemed to
    have a substantial nonexempt purpose, and will not qualify for
    tax exemption at all. ((Indiana Retail Hardware Association v.
    United States, 366 F.2d 998 (Ct.Cl. 1966).))  The exact level of
    income from unrelated activities that will endanger an
    organization's exempt status is a matter of some debate among tax
    practitioners. ((Thomas A. Troyer, "Quality of Unrelated Business
    Consistent with Charitable Exemption -- Some Clarification, " The
    Exempt Organization Tax Review, Vol.6., No. 2 at 409 (August
    1992).))
    
               While advertising income is a common source of
    unrelated business taxable income for exempt organizations, not
    all advertising income is automatically subject to tax as
    unrelated.  The U.S. Supreme Court ((U.S. v. American College of
    Physicians, 475 U.S. 834 (1986).)) has held that the sale of
    advertising should be evaluated under the general rules for
    distinguishing related and unrelated trades or businesses,
    discussed above.  The sale of advertising in an exempt journal
    will be an unrelated trade or business unless it contributes
    importantly to the accomplishment of the organization's exempt
    purposes.  This determination requires intensive analysis of the
    facts and circumstances of the advertising activity in question.
    
              The members allege that "advertising in TI is almost
    certainly unrelated business income."  Based on our review of
    Tournaments Illuminated (Summer 1995, Issue 115) and the SCA
    Marketplace brochure, we disagree.  To the contrary, we believe
    convincing arguments can be made that most of the advertising in
    Society publications is substantially related to the Society's
    educational purposes, and therefore the associated net income
    would be exempt from tax.  For example, we found advertising for
    educational books and materials, musical instruments, Elizabethan
    costuming, pavilions, rattan fighting swords, aquitaines,
    feastware, and Middle Ages-style cloaks.  Each of these products
    is directly related to the Society's exempt activities; in many
    cases, participants in the Society's educational activities would
    be unable to acquire information, tools, and materials for
    historically accurate props and costumes, or other items that
    contribute to historical re-creation, without access to the
    products advertised by vendors in the magazine.
    
              We did note one advertisement for greeting cards in
    Tournaments Illustrated that is not related to the Society's
    exempt purposes, in our opinion, the net income from which should
    be treated as taxable.
    
              A separate but related issue is raised by products sold
    by the Society.  The Society's educational experience -- "living
    history" -- relies to a great extent upon individual
    participation in the historical reconstruction of pre-17th
    century Europe. Everyone who attends Society events is expected
    to conform to the style of dress, speech and behavior appropriate
    to that period.  Because the costumes, objects and technologies
    suitable to a historically accurate reconstruction are rarely
    found in today's world, the "SCA Marketplace" offers a wide
    variety of instructional articles, patterns and how-to books.  In
    our opinion, sales of these products directly further the
    Society's exempt purposes by providing Society participants with
    reference works as well as reproduced historical objects which
    are utilized in the research and re-creation of medieval history. 
    Under these circumstances, the sales should not generate taxable
    income to the Society.  
              Based on the foregoing and our review of the Society's
    Form 990-T (on which an exempt organization reports its taxable
    unrelated business income), we conclude that it is possible that
    the Society is in fact overreporting, rather than underreporting,
    its unrelated business taxable income.  Unfortunately, the
    Society's history of treating its advertising income as taxable
    would probably be treated by the IRS as evidence that the
    activity is unrelated.  Therefore, the Society would have to meet
    a heavier than usual burden of proof were it to change its
    reporting position at this point.  The Board might wish to obtain
    an in-depth, closely-researched legal opinion before proceeding,
    which could be expensive, off-setting the benefits of eliminating
    much of the Society's taxable income, assuming that result were
    approved.  The Society's accountant should be able to determine
    how much tax savings might result from a favorable legal opinion,
    to assist the Board in deciding how to proceed.
    
              The Board should also ensure that Society staff who
    accept advertising in Society publications or who develop
    products to be offered for sale by the Society understand the
    unrelated business income rules so that they can screen out
    inappropriate advertisements or products, or ensure that any
    associated net income is treated correctly as unrelated business
    income subject to tax.
    
              Private inurement.  Section 501(c)(3) of the Code
    states that only organizations "no part of the net earnings of
    which inures to the benefit of any private shareholder or
    individual".  Private inurement refers to an abuse by those who
    control the organization: one prominent treatise states that
    "inurement is a private benefit provided to insiders who have the
    institutional opportunity to direct the organization's resources
    to themselves, to entities in which they have an interest, or to
    family members." ((Frances R. Hill and Barbara L. Kirschten,
    FEDERAL AND STATE TAXATION OF EXEMPT ORGANIZATIONS, 2-84
    (1984).))  Private inurement is absolutely prohibited for a
    Section 501(c)(3) organization like the Society and, if present,
    would be grounds for revocation of the Society's tax exemption.
    ((Treas. Regs. Section 1.501(c)(3)-1(c)(2).))
    
              Private inurement must be distinguished from private
    benefit.  As noted above, private inurement results from an
    insider misdirecting an organization's assets away from its
    proper exempt purposes.  Private benefit, on the other hand, does
    not require any insider control; it is often evident just from
    the non-exempt purposes of the organization, but can occur even
    where the organization has proper exempt purposes, but operates
    in a way that appears to be directed at benefitting private,
    rather than public, interests.  To illustrate the difference,
    private inurement occurs where a director causes the Board to
    approve excessive compensation to him- or herself; private
    benefit occurs where the Board approves a relationship with an
    unrelated consultant that pays excessive compensation to the
    outsider.  IRS regulations permit an "insubstantial" amount of
    private benefit. ((See Code Section 501(c)(3) and Tres. Regs.
    Section 1.501(c)(3)-1(c)(1).))  Whether or not a private benefit
    is "insubstantial" is to be determined in light of all the facts
    and circumstances of that particular case.  Generally, private
    benefit that is incidental to and a necessary side effect of
    achieving an exempt purpose is considered insubstantial.
    
              The members allege specific instances amounting to a
    pattern of private inurement.  The allegations include the
    advertisement of a private, for-profit event in a regional
    newsletter as if it were a Society-sponsored event (an incident
    that happened ten years ago and which the members acknowledge was
    an oversight by responsible Society officers and fraudulent on
    the part of the private individuals involved), the theft of money
    from the Society, and the questionable use of Society funds for
    personal travel.
    
              An isolated incident of theft or a mistake in
    advertising does not amount to private inurement.  While the
    Board has a fiduciary duty to take reasonable steps to protect
    the Society's assets, no organization can realistically guarantee
    the honesty or competence of every individual who volunteers for
    it, nor does the tax law require it.  We presume that the Society
    has responded or will respond to the alleged incidents
    appropriately, both with respect to pursuing recovery of assets
    and preventing similar incidents from occurring in the future. 
    So long as the organization has appropriate procedures to
    minimize the opportunities for misappropriation or misuse of its
    assets, and attempts reasonably and in good faith to enforce
    them, isolated failures of the system do not amount to private
    inurement and will not endanger the Society's exempt status.
    
              The members, in their allegations, also seem to have
    confused private inurement with private benefit.  Specifically,
    the members allege that the Society "frequently operate[s] in a
    fashion which allows merchants to benefit privately.  This MAY be
    private inurement."  However, the presence of "merchants" at an
    exempt organization's events raises a question of private
    benefit, not private inurement, and whether or not the level of
    private benefit is so substantial as to bring into question the
    organization's exempt status is to be determined based on a full
    exposition of the facts and circumstances surrounding that
    particular event or transaction. ((St. Louis Science Fiction
    Limited v. Commissioner, 49 T.C.M. (CCH) 1126 (1985).))  While we
    have not attended a Society event as part of this investigation,
    it appears that the purpose of the Society's events is not to
    benefit vendors, but to provide educational experiences through
    historical re-creation, and the presence of the vendors, subject
    to a variety of requirements ensuring historical accuracy in
    their presentations, makes a more realistic re-enactment of
    historical settings possible and attracts more members of the
    public to attend and be educated, thus directly furthering the
    Society's educational purposes.  Of course, the Board should
    always monitor merchant participation at its events to ensure
    that it is not only compatible with, but in fact enhances, the
    events' educational value.
    
              Substantial non-exempt purpose.  Finally, the members
    allege that the Society is not operated, in the language of
    Section 501(c)(3), "exclusively" for its exempt purpose --
    promotion of research and re-creation in the field of pre-17th
    century Western culture for the public's benefit -- but rather is
    also operated for social or recreational purposes.  This
    allegation is the most serious of those made by the members, both
    because it appears at first glance to be factually true, and
    because the consequences to the Society would be severe.
    
              Section 501(c)(3) of the Code exempts from Federal
    income tax organizations "organized and operated exclusively for"
    exempt (i.e., charitable, educational, etc.) purposes.  Section
    1.501(c)(3)-1(c)(1) of the Treasury Regulations implementing the
    Code elaborates that an organization will be regarded as
    "operated exclusively" for exempt purposes only if it engages
    primarily in activities which accomplish one or more of the
    exempt purposes specified in Code Section 501(c)(3).  An
    organization will not be exempt if more than an "insubstantial"
    part of its activities is in furtherance of a non-exempt purpose.
    
              Education, for purposes of tax exemption, is defined by
    Treas. Regs. Section 1.501(c)(3)-1(d) as either "(a) [t]he
    instruction or training of the individual for the purpose of
    improving or developing his capabilities; or (b) [t]he
    instruction of the public on subjects useful to the individual
    and beneficial to the community."  While this definition
    encompasses traditional educational institutions like schools,
    universities, and the like that have a set curriculum, an
    identifiable faculty, and a student body, it is far broader. 
    Museums of every type, zoos, orchestras, theaters, organizations
    which disseminate information (ranging from facts on
    environmental degradation to the reasons for international
    cooperation), organizations which re-create Civil War battles,
    garden clubs, and gem and mineral clubs, have all qualified as
    educational organizations.
    
              Determining whether an organization is organized and
    operated primarily for educational purposes requires an
    investigation of the specific facts and circumstances of the
    organization and its activities.  Tension between the educational
    and the recreational or social is not uncommon, and has been
    addressed by the IRS repeatedly.  For example, a gem and mineral
    club can be organized and operated either as an educational
    organization, or as a social club. ((Rev. Rul. 67-139, 1967-1
    C.B. 129.))  A club formed "to advance the earth sciences by
    stimulating interest and encouraging study" that holds monthly
    lectures, sponsors field trips, issues a bulletin, assists local
    museums, maintains a library, and annually conducts a show for
    the general public at which members and nonmembers exchange
    lapidary techniques, display collections of gems and minerals,
    and compete with one another for prizes and awards, with the
    public invited to attend its functions and programs, will qualify
    for exemption under Section 501(c)(3).  The IRS explicitly
    acknowledged the social aspects of club operation.  Nevertheless,
    the IRS found that the club's educational methods (i.e. lectures,
    discussions, shows, field trips) are "educational" within the
    meaning of the Code and Regulations, and that "[t]hese activities
    are educational within the meaning of the regulations even though
    they serve recreational interests."  
    
              In contrast, another gem and mineral club, which was
    "formed to disseminate knowledge of mineralogical and lapidary
    subjects, to promote their application so that greater pleasure
    may be derived from these activities, and to promote good
    fellowship among its members," was determined to be a social
    club.  This club held monthly social meetings where minerals and
    gems were informally discussed, issued a bulletin containing news
    of members' social activities and their rock and mineral
    collections, and held an annual show.  The IRS found that the
    club was operated primarily "to accommodate its members in their
    recreational pursuits.  The gem and mineral show serves to
    stimulate the members' hobby interests and is, thus, consistent
    with the [club]'s recreational purposes."
    
              Where recreational, social, and educational purposes
    are intertwined in a single activity, the IRS looks to the
    content of the activity to make a judgment as to whether the non-
    educational purpose of the activity is substantial.  This is a
    fact-intensive inquiry.  St. Louis Science Fiction Limited v.
    Commissioner ((Supra, note 7.)) ((which said "St. Louis Science
    Fiction Limited v. Commissioner, 49 T.C.M. (CCH) 1126 (1985)."))
    presents a good example.  The science fiction society's principal
    activity was its annual convention.  Its purposes were "to
    promote and stimulate interest in speculative fiction (in print,
    movie and video form) and art and related activities."  At the
    convention, science fiction authors and personalities gave
    readings and panel discussions.  Other activities included
    masquerade parties, a pool party, a sing-a-long program, a 24-
    hour video room, a 24-hour game room, movies, an art show and
    auction, and a "huckster's room."  The IRS found that many of
    these component activities (such as the pool party, the "dead
    dog" party, etc.) served strictly recreational or social
    purposes.  Even the more educational activities, like the panel
    discussions, "contained a predominantly recreational tone." 
    Among the films shown, the IRS acknowledged the educational value
    of such science fiction classics as 2001: A Space Odyssey but
    questioned the showing of Hardware Wars (a spoof on Star Wars)
    and Star Trek Bloopers.  Under these circumstances, the IRS
    concluded that the organization had substantial non-exempt
    purposes, and was therefore not entitled to exemption.  This case
    demonstrates how substantial a level of recreational and social
    activity must be present to bring exempt status into question.
    
              In another close case involving exempt and nonexempt
    purposes intertwined, the IRS's ruling against the organization
    was reversed by the courts.  Cleveland Creative Arts Guild
    ((Cleveland Creative Arts Guild v. Commissioner, 50 T.C.M. (CCH)
    272 (1985).)) involved an organization formed to promote the
    arts.  Among other activities, it sponsored art festivals and
    craft shows featuring competitions and sales by artists and
    craftspeople.  The IRS, focusing on the sales, ruled that the
    organization had a substantial commercial purpose, precluding
    exemption.  The Tax Court reversed the IRS decision, on the
    grounds that the sales must be viewed in the overall context of
    the group's activities.  The Court stated that, in determining
    whether an activity was engaged in for a substantial non-exempt
    purpose, the relevant factors included (1) the manner in which
    the activities are conducted, (2) the "commercial hue" of the
    activities, and (3) the existence and amount of profit from the
    activities.  The Court criticized the IRS's focus on sales
    activities and portions of festival advertising, finding that, in
    context, "the sales activities in question are incidental to the
    exempt purpose of promoting the arts . . .".
    
              These examples show that the question of whether or not
    the Society is operated primarily for educational purposes as the
    law requires, is a complex one not given to glib or easy answers. 
    Our review of the Society's publications and the "Rialto" on the
    Internet revealed an ongoing and consistent effort to accomplish
    the organization's stated educational purposes.  Tournaments
    Illuminated (Summer 1995) contains six articles, all dealing with
    one aspect or another of pre-17th Century Western culture.  The
    two issues we reviewed of the newsletter of the Kingdom of the
    West (June and November 1995) present a listing of upcoming
    events, classes, and tournaments.  There are no purely social
    announcements and no events noticed other than Society events,
    all cast in the style of pre-17th Century Europe.  If these
    publications and fora are representative of Society publications
    and events, and of the Society as a whole, the Board may rest
    assured that the Society is entitled to its educational tax-
    exempt status.
    
              The members specifically criticize some of the
    Society's events, such as the Pensic, as overly recreational and
    social.  We suspect this criticism arises from a
    misunderstanding.  Education and recreation are not mutually
    exclusive: in fact, they may be completely complementary.  Being
    educational does not mean that participants are forbidden to have
    a good time; to the contrary, enjoyment enhances the educational
    value of participation, so that making educational events
    enjoyable furthers educational purposes.  The question is whether
    the purpose of the activity is primarily educational.  Although
    we do not have first-hand experience with the Society's events,
    unsolicited comments from the "Rialto" suggest that the Pensic in
    particular is highly educational.  One writer discussing a Pensic
    said, "I met people making rope beds who never tried using a
    chisel before, saw people making bone needles to sew their
    leather lamalas together with, gentles making shoes, finishing
    garments of fine cloth THAT THEY WOVE [emphasis in the original]. 
    I witnessed the shooting of a war point, folks fighting in stout
    steel and sturdy leather, people gathering dye stuffs and soaking
    samples . . . heard tales of Beowulf and Njal.  I enjoyed a
    performance of comedia, got to play a portative organ . . ." 
    This experience was evidently educational not only for the
    commentator, but also for the performers.  That both observers
    and participants in all likelihood enjoyed themselves and each
    other's company while learning does not detract in the least from
    the educational purposes served by the activities, and will not
    be held against the Society by the IRS.  
    
              It is understandable that some members may be
    uncomfortable with having to rely on an assessment of intangible
    factors like the "recreational tone" the IRS found troubling in
    the St. Louis Science Fiction case, or the "commercial hue"
    referred to by the Tax Court in Cleveland Creative Arts Guild. 
    But in both instances, the overall context in which specific
    problematic activities occurred is key to explaining the result. 
    The manifestly educational purposes of the Society pervade all
    the activities which we have been able to consider, and each
    activity clearly advances those purposes, in our opinion.  The
    "Welcome to the Current Middle Ages" flyer is a prime example, as
    it locates the Society's activities within an educational
    framework and sets the "tone", or "hue", by which we can
    understand the Society's operations.
    
              The members also question the historical accuracy of
    the Society's re-creations.  The very existence of the
    controversy is further evidence of the Society's educational
    purposes.  Disagreements over details of culture and technology
    of 17th century Europe -- the appropriate language, the exact
    replication of clothing and weaponry -- are bound to prompt study
    and the mustering of evidence on either side, and the atmosphere
    of controversy and criticism is hardly indicative of a social
    club.  To the contrary, such debate is inherent in any vibrant
    educational endeavor, particularly one concerned with reproducing
    an era which existed over 400 years ago.
    
    Conclusion
    
              Reports and record keeping.  In a widespread and active
    membership organization such as the Society, with several levels
    of hierarchy in governance, keeping accurate and complete
    corporate and financial records and making complete, accurate,
    and timely reports to regulators is an extremely difficult, as
    well as critical, task.  Although we did not review extensive
    Society records, based on our experience in performing legal
    audits of other large organizations run primarily by volunteers,
    there are always areas where improvements in procedures and
    compliance can be made.  This is especially true of older
    organizations like the Society.  The Board bears the
    responsibility for overseeing legal compliance efforts and
    monitoring the results, and we would be happy to assist.  The
    Board and the organization will not, however, be held to a
    standard of total accuracy, exhaustiveness, and timeliness in
    order to retain the Society's tax-exempt status.
    
              Unrelated business income taxes.  The Board should
    review with the Society's auditors the rules for determining what
    portion of its income, if any, is taxable as unrelated business
    income.  The Board should also ensure that staff are provided
    with such information on unrelated business activity as they may
    need to operate the Society within the dictates of the law while
    minimizing taxes due.  Should the Board wish to consider
    reversing its position on advertising income, a written legal
    opinion should be sought.
    
              Private inurement.  We found no evidence of private
    inurement or inappropriate private benefit in the materials we
    reviewed.  The Board may wish to systematically consider Society
    operations not covered by our investigation to ensure that this
    can be said of the Society as a whole and without exception.  We
    would be happy to review any specific situations that raise Board
    or member concerns.
    
              Substantial non-exempt purpose.  We believe, based on
    our review and assuming the limited documents we reviewed are
    truly representative of the Society's overall operations, that
    the Society is clearly entitled to its tax-exempt status as an
    educational organization, and that the social and recreational
    value of Society events enhances, rather than decreases, their
    educational impact.  Nonetheless, the members' allegations should
    serve as a reminder to the Society's Board and membership of the
    need to test each activity of the Society against an educational
    yard-stick.  But having passed that test, recreational and social
    value should not be a bar to the Society's decision to engage (or
    continue engaging) in a particular activity.
    
    
    EXHIBIT A
    
    Documents Reviewed
    
     1.  Report to the Board by Mark Schuldenfrei (Tibor) dated
         October 5, 1995 attaching a report entitled "Is SCA, Inc.
         Entitled to Tax-Exempt Status Under the Internal Revenue
         Code of the United States" by Lisa J. Steele, Esq.
     2.  Amended Articles of Incorporation dated September 15, 1989 
     3.  Corporate Bylaws 
     4.  1993 Form 990 and Form 990-T
     5.  Organizational Handbook 1995
     6.  Membership Application (1/95)
     7.  Flyer entitled "Welcome to the Current Middle Ages"
     8.  Tournaments Illuminated (Issue 115, September 1995)
     9.  The Page (Newsletter of the Kingdom of the West) (June 1995
         and November 1995)
    10.  SCA Marketplace Price List (9/95)
    11.  Random discussions between members over the Internet ("the
    Rialto")
    
    top of page