4.76.24  Corporations Organized To Finance Crop Operations IRC 501(c)(16)

Manual Transmittal

January 28, 2015

Purpose

(1) This transmits revised IRM 4.76.24, Exempt Organizations Examination Guidelines, Corporations Organized To Finance Crop Operations IRC 501(c)(16).

Material Changes

(1) Converted this manual to plain language to comply with the Plain Writing Act of 2010, P.L. 111-274.

(2) Added "or the members thereof" to IRM 4.76.24.2 (1) to clarify who could set up an IRC 501(c)(16) organization.

(3) Inserted "capital" at IRM 4.76.24.3 (3) to clarify the type of stock involved.

(4) At IRM 4.76.24.3 (4), modified the directions to indicate that the first step is to determine whether there is a reserve. Further modified to emphasize checking whether the reserve is required by state law.

Effect on Other Documents

This IRM supersedes IRM 4.76.24, Exempt Organizations Examination Guidelines, Corporations Organized To Finance Crop Operations IRC 501(c)(16), dated January 1, 2003.

Audience

Tax Exempt and Government Entities
Exempt Organizations
Examinations

Effective Date

(01-28-2015)

Tamera L. Ripperda
Director, Exempt Organizations
Tax Exempt and Government Entities

4.76.24.1  (01-28-2015)
Introduction

  1. This IRM contains specific audit guidelines for IRC 501(c)(16) organizations. It gives audit methods useful in finding and developing issues commonly faced during IRC 501(c)(16) organization audits.

  2. These guidelines give specific aid for IRC 501(c)(16) organization audits and aren’t all-inclusive. The purpose is to add to the guidelines in:

    • IRM 4.75.10, Exempt Organization Pre-Audit Procedures

    • IRM 4.75.11, On Site Examination Guidelines

    • IRM 4.75.12, Required Filing Checks

    • IRM 4.75.13, Issue Development

  3. The intent isn’t to restrict identification of issues or using audit techniques not included herein.

  4. This IRM doesn’t contain detailed technical information regarding IRC 501(c)(16) organizations. Review IRM 7.25.16, Corporations Organized to Finance Crop Operations.

4.76.24.2  (01-28-2015)
Background Information

  1. IRC 501(c)(16) exempts from federal income tax corporations:

    1. Organized by an IRC 521 farmers’ cooperative marketing or purchasing association, or members thereof.

    2. Financing the ordinary crop operations of members or other producers.

  2. The financing corporation must operate in conjunction with the marketing or purchasing association.

4.76.24.3  (01-28-2015)
Audit Guidelines

  1. Determine whether the organizing farmers’ cooperative is an IRC 521 association or IRC 521 corporation. If the cooperative is exempt under IRC 521:

    1. Obtain a copy of its determination letter.

    2. Inspect the cooperative’s annual tax return.

  2. Inspect the governing instruments. Evaluate the organization’s operations. Determine whether:

    1. The organizing IRC 521 organizations, or members, hold substantially all of the voting stock.

    2. Nonvoting preferred stock, if issued, holds no right to participate in the profits of the organization beyond the fixed dividend rate.

  3. Verify that the dividend rate on all capital stock doesn’t exceed the greater of:

    1. The legal rate of interest in the state where incorporated.

    2. Eight percent per year on the cost of the stock when issued.

  4. Determine if there is a reserve. Determine the purpose, the need, and the reasonableness of the reserve(s). Find out if state law requires a reserve.

    Example:

    A reasonable reserve for the erection of buildings required in the business operation.

  5. If you find any problems or have concerns regarding the farmers’ cooperative, ask for help from Small Business/Self Employed (SB/SE) or Large Business and International (LB&I).


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