4.76.29  Apostolic Associations - IRC 501(d)

4.76.29.1  (06-04-2010)
Introduction

  1. ) This section describes the requirements and procedures for conducting an examination of apostolic organizations or corporations.

  2. IRC §501(d) provides exemption under IRC §501(a) for a specific type of communal organization that would fail to qualify under IRC §501(c)(3).

  3. Organizations exempt under IRC §501(d) are ones organized for the purpose of operating a communal religious community where the members live a communal life following the tenets and teachings of the organization.

  4. All of the organization’s property is owned in community and, each member, upon leaving the organization, is entitled to no part of the community assets.

  5. Activities often consist of farming and manufacturing.

  6. The income of the organization goes into a community treasury that is used to defray operating expenses and the cost of supporting and maintaining the members and their families. See Rev. Rul. 57-574, 1957-2 c.b. 161.

4.76.29.2  (06-04-2010)
Exemption Application

  1. There is no prescribed form to be used by an organization seeking exemption under IRC §501(d). Any form of written application is acceptable. Deer Rev. Proc. 72-5, 1972-1 c.b. 709.

  2. In order to establish that it meets the statutory and regulatory requirements for exemption, the application submitted by an organization should contain the following documents and information:

    1. A copy, including any amendments thereto, of the organization’s articles of association, articles of incorporation, or other document authorizing its formation,

    2. A copy of the bylaws or other code of regulations under which the organization operates or plans to operate,

    3. A complete statement of assets and liabilities of the end of each annual accounting period (or as of the date of the filing of the application, if the organization has been in existence for less than a year), and

    4. A statement of receipts and expenditures for each annual accounting period (or for the period for which the organization has been in existence, if less than a year).

  3. Organizations seeking exemption must include with the application a written statement showing:

    1. The character, purposes, and activities (present or proposed) of the organization,

    2. Whether the organization maintains a common or community treasury,

    3. Whether all members of the organization live in a communal manner,

    4. Whether the members may own, in their own names, any real or personal property,

    5. Whether the members must furnish their own support (food, clothing, and shelter), and

    6. The requirements for membership, method of admission of members, the right of members to property owned at the time of admission, and the rights of those terminating membership to share in the property of the organization, or to a return of any property contributed.

  4. The written statement must be signed by a principal officer of the organization and contain the following declaration, or a declaration of like import: “Under penalties of perjury, I declare that I have examined this application, including accompanying statements, and to the best of my knowledge and belief it is true, correct, and complete.

  5. Members are not required to surrender their personal possessions upon joining the organization. In Twin Oaks Community, Inc. v. Commissioner, 87 T.C. 1233 (1986), the Tax Court rejected the Service position that the requirement for a common treasury or community treasury meant that members must take a vow of poverty and irrevocably contribute all of their property to the organization.

  6. Apostolic organizations are not required to fit the “classical” mode of a religious organization, such as monasteries and convents. In Twin Oaks Community, Inc. (supra), the Court stated “Twin Oaks does not sponsor the formal services and liturgies of conventional religions, but rather focuses on creating an environment for the daily practice of its beliefs. Regular meetings are conducted for discussions and lectures on subjects that concern or affect its beliefs.”

  7. In Kleinsasser v. United States, 707 F. 2d 1024 (9th Cir. 1983), the Ninth Circuit made the following comments: “The only requirements for the exemption are that there be a common treasury, that the members of the organization include pro-rata shares when reporting taxable income, and implicitly, that the organization have a religious or apostolic character. Once this requirement of form is fulfilled, the exempt organization is unlimited as to function.”

4.76.29.3  (06-04-2010)
Annual Return

  1. (1) Under Regulation §1.6033-2(e) and the filing instructions for Form 1065, IRC §501(d) organization is required to file a partnership return on Form 1065. Even though exempt from income tax, an IRC 501(d) organization must compute "taxable income" in order to determine the amounts its members will include in their gross incomes. A religious or apostolic organization must figure its taxable income on an attachment to Form 1065 in the same manner as a corporation. Form 1120 U. S. Corporation Income Tax Return, may be used for this purpose.

  2. Taxable income must be allocated to its members as a dividend, whether distributed or not.

  3. Net operating losses are not deductible by the members but may be carried back or forward by the organization under the rules of IRC §172.

  4. In determining the pro rata shares of a religious and apostolic association’s or corporation’s taxable income to be included in the gross income of its members, the membership is determined by applicable state law, the rules of the organization, and the consent of individuals with respect to their status as members. Parents may consent to their children’s membership to the extent allowed under applicable state law. Rev. Rul. 77-295, 1977-2 c.b. 196.

  5. IRC §262(a) prohibits deductions for personal, living, or family expenses. The District Court in Stahl v. United States, 673 F. Supp.2d 1233 (E.D. Wash. 2009)104 A.F.T.R.2d 2009-7523, held that “If a §501(d) organization is entitled to take a §162(a) deduction for food and medical care it provides to its members (and its far from clear whether such a deduction is ever available), the §501(d) organization may take the deduction only if, at a minimum, the member is an employee of the organization.” The members were not employees of the organization.

    Note:

    Apostolic organizations can have employees. Such individuals are non-members of the organization, and would receive Forms W-2. Members of the organization do not meet the tests and requirements to be treated as employees. For an analysis, see Stahl v. United States, (supra).

  6. IRC §501(d) organizations are required to make their annual Form 1065 returns available for public inspection for three years after the return is due. IRC §501(d) organizations are also required to make available a copy of their exemption application letters, any supporting documents, and their exemption letters.

  7. Failure to make these documents available for public inspection may subject the organization to a penalty of $20 per day for each day there is a failure to comply (up to a maximum of $10,000 in the case of an annual return). See IRC §6104(d) and IRC §6652(c)(1)(C). Assessment procedures are in IRM 20.1.8. However, the Schedule K-1's need not be disclosed.

4.76.29.4  (06-04-2010)
Pre-Audit Examination Procedures

  1. (1) TE/GE has primary examination responsibility for the examination of Forms 1065, U.S. Return of Partnership Income filed by religious and apostolic organizations described in IRC §501(d). Assistance from Large and Medium Size Business (LMSB) on the examination of Form 1065 may be requested as necessary. Small Business and Self Employed (SBSE) would be contacted for assets less than $10 million).

  2. TEGE will refer examinations of Form 1040, U.S. Individual Income Tax Return to SBSE where material adjustments are involved. SB/SE should be notified as early as possible in the examination process to provide them with the opportunity to place the partner’s return on the Partnership Control System, described in IRM 4.29 and 4.31.5.8.

  3. Forms 1065 properly filed by apostolic organizations (i.e. indicated that they were exempt under §501(d) on the Form 1065,) are not subject to the TEFRA procedures of IRM 4.31.2. The organization is also not subject to the non-TEFRA procedures of IRM 4.31.5, however those guidelines will be used by SB/SE if requested to work the Forms 1040.

  4. Forms 1065 are not available for download from Online SEIN. Returns must be ordered from files, via either establishing a case on (Reporting Compliance Case Management System (RCCMS), or use of command code ESTAB on IDRS.

  5. Limited transcripts of Form 1065 are available via the TDS (Transcript Delivery System) application and IDRS. If electronically filed, Forms 1065 may be available from the MeF (Modernized e-File) application.

  6. Adjustments to Form 1065 can be made using RGS NT. For agents not familiar with Forms 1065, consult with fellow agents who have such experience (former SB/SE or LMSB revenue agents), or with manager permission, submit a specialist request via SRS (Specialist Referral Service) via the IRS Intranet ..

  7. The determination application can be obtained from the EO Microfiche Unit in Cincinnati, prior to opening the examination using Form 8057,.EP/EO Microfiche Request. Electronic versions can be requested, and will be provided on CD.

  8. If the application is not among the microfiche files, include a request for the determination application and determination letter in the initial document request.

  9. Upon receipt of the file, review the application. If from Cincinnati, look at any notes made by the determination specialist on the non-disclosable portion of the file.

  10. Determine in the review of the application, whether:

    • The organization is organized for the purpose of operating a communal religious community.

    • Members must live a communal life following the tenets and teachings of the organization.

    • Each member, upon joining, completely surrenders to the organization all property, which he or she owns,

    • Alternatively, if each member is permitted to retain any personal effects upon admission to the organization,

    • Upon leaving the organization, members are entitled to any part of the group assets.

    • There is a communal business activity, such as farming, manufacturing, or other industry.

  11. Determine whether the organization is incorporated.

    1. If incorporated, check the website of the state agency responsible for corporate registrations to determine if the organization has filed any amended documents.

    2. If unincorporated, request in the initial information document request copies of any amendments to the articles of association, charter or other organizing document.

    3. If amendments have been made, verify that they have been included in the determination file. Any amendments not previously included need to be added by sending copies of the documents to Cincinnati using the procedures outlined in IRM 4.75.16.

  12. Review the bylaws of the organization.

    1. Take note of the leadership structure, or lack thereof.

    2. Determine how control of the organization transitions from person to person (election, inheritance, challenge, etc.)

    3. Determine who l is permitted to be a member. (The Service has ruled that minor children can be counted as members if the organization is so structured and such membership is not otherwise restricted by law.. Rev. Rul. 77-295, 1977-2 c.b. 196.

    4. If the organization provides voting rights, note the classes of membership and those who are permitted to vote.

  13. Review the Form 1065 to identify the source of the income reported.

    1. The income reported is to be from a community operated business.

    2. Per Revenue Ruling 78-100, 1978-1 c.b. 162, an organization supported by wages earned by members from outside employment, rather than from internally operated businesses, is not described in IRC §501(d).

    3. A member of a religious organization who has taken a vow of poverty and is instructed by the organization’s superiors to obtain outside employment must include the remuneration remitted to the organization in his or her gross income, and the remuneration is subject to FICA and income tax withholding.. Revenue Ruling 80-332, 1980-2 c.b. 34. However, an organization supported by wages earned by members from outside employment, rather than from internally operated businesses, is not described in IRC §501(d). Revenue Ruling 78-100, 1978-1 c.b.-162.

  14. Review the expenses and credits deducted on Form 1065.

    1. The organization is entitled to take deductions regularly permitted to taxable corporations.

    2. Take note of any deductions for food, medical expenses, or other fringe benefits normally provided to employees.

    3. Determine whether any amount has been reported for payment of compensation to individuals.

  15. Use command code PMFOL to determine whether any information returns were filed. If yes, use command code IRPTRR to request the Forms W-2 and 1099 issued by the organization.

    1. When received from the Service center (approximately two weeks,) determine who received Forms W-2.

    2. In the initial information document request, ask for a list of all members of the organization.

    3. Compare the amounts reported on Forms W-2 (if any) to the Form 1065.

  16. Check to see if the organization has a website.

    1. Verify the business activity of the organization.

    2. Determine the current identity of the leaders of the organization, if provided.

    3. See if the tenets of the organization are provided on the website.

    4. Review the organizing documents, if available online.

4.76.29.5  (06-04-2010)
Field Examination Procedures

  1. Tailor the initial interview questions to the organization.

    1. If the tenets/creed/statement of religious beliefs were not provided either in the determination application or on a website, request to see the tenets.

    2. Determine whether there is a central body of authority for the organization.

    3. Identify the internally operated communal business activities that generate the income of the organization.

    4. Inquire about external (individually generated) sources of income and about how that income is treated by the organization.

    5. Request an explanation of the expenditures deducted on the Form 1065.

    6. Ask about the organization’s requirements concerning personal property owned prior to, during, and after a person’s period of membership.

    7. Clarify whether the organization employs any non-member labor, and for what activities.

  2. The tour of the facilities should focus on whether the organization requires communal living.

    1. Request an explanation of how the organization operates as a communal organization.

    2. View the facilities where the community business activities are conducted.

      Note:

      The organization is not subject to Unrelated Business Income Tax (UBIT). All income generated by the organization is to be reported as a dividend to members on a pro-rata basis.

    3. Identify all the sources of income producing activities.

    4. If Forms W-2 were filed, meet the persons who are employees, if present, to inquire if they are also members of the organization.

    5. Obtain clarifications as to the type of labor that is performed by non-members.

  3. Review the general ledger and/or check register.

    1. Reconcile the ledger (or adjusted trial balance) to the Form 1065.

    2. Identify the dates, amounts, and sources of income.

    3. Obtain substantiating documentation for questionable expenses (those that have been deducted that appear to be for food, medical, and living expenses of members.)

    4. Verify that the expenses reported are deductible.

    5. If available, view the retained check images (either photocopied by the organization, or provided by the bank,) to check for any earmarking or that the checks are not made out to the organization.

4.76.29.6  (06-04-2010)
Concluding The Examination

  1. Determine if the organization continues to qualify for exemption under §501(d). Prepare a report of examination revoking the organization:

    • If the organization lacks a religious or apostolic character.

      Note:

      Counsel must be consulted, as the “religious or apostolic character” is not defined in law.

    • If the organization substantially relies upon the wages generated by members from activities external to the communal business activities.

    • If the organization lacks a communal trust or bank account in which income is deposited and expenses disbursed.

    • If there was income that the organization failed to allocate to its members.

  2. For an agreed revocation:

    1. Discuss the issue with the taxpayer fully to verify that taxpayer will agree.

    2. Issue the final report using Letter 3610, Forms 886-A, 4621-A, and 6018-A. Provide the taxpayer with 30 days to respond.

    3. Prepare Form 2363-A for a revocation. The filing requirement of a revoked 501(d) organization remains the same. The organization will become subject to TEFRA rules under IRC §6233.

    4. Close the case to Mandatory Review.

  3. For an unagreed revocation:

    1. If not otherwise excluded from Fast Track Settlement, issue a report of preliminary findings (draft RAR), with a drafted cover letter, Forms 886-A, 6018-A, and 14017, Application for Fast Track Settlement with Publication 4539, Fast Track Settlement Brochure. Allow 30 days for a response.

    2. For cases not entered into the Fast Track Settlement process, issue the final report using Letter 3610, Forms 886-A, 4621-A, and 6018-A. Provide the taxpayer with 30 days to respond.

    3. Prepare Form 2363-A for a revocation. The filing requirement of a revoked 501(d) organization remains the same. The organization will become subject to TEFRA rules under IRC §6233.

    4. Close the case to Mandatory Review.

  4. Identify any adjustments to be made to the Form 1065 and the Schedules K-1.

    1. Obtain assistance from SB/SE for adjustments to members' Forms 1040, and if necessary, on making the adjustments in RGS to the Forms 1065.

    2. Prepare adjustments to the Form 1065 using RGS NT. Training Publication 22801-104 Report Generation Software (RGS) Form 1065 Workshop (Participant Guide) explains how to perform the adjustments.

    3. Prepare a report of examination to the organization explaining the adjustments.

    4. Coordinate the issuance of the report with SB/SE, who will issue their own reports on the Forms 1040, and provide them with the RGS electronic file.

    5. The agent prepares a Form 4605, a Form 886-A, Explanation of Items, and a Form 886-S, Form 886-X, Form 886-W or Form 886-Z to show the corrected flow-through amounts for each investor. A Form 875 is used to secure agreement from the entity. All are available on RGS.

    6. Issue the report with Letter 921.

  5. If the organization is to be revoked, and adjustments are to be made to the Forms 1065, obtain assistance from SB/SE or LMSB in pursuing TEFRA procedures.

  6. If the case is to be closed as a no change, prepare Letter 3594 and close following the procedures outlined in IRM 4.76.16.


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