Board of Directors

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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")
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