501(c)(4) — Civic Leagues and Social Welfare Organizations
If your organization is not organized for profit and will be operated only to promote social welfare, you should file Form
1024 to apply for
recognition of exemption from federal income tax under section 501(c)(4). The discussion that follows describes the information
you must provide when
applying. For application procedures, see chapter 1.
To qualify for exemption under section 501(c)(4), the organization's net earnings must be devoted only to charitable, educational,
or recreational
purposes. In addition, no part of the organization's net earnings may benefit any private shareholder or individual. If the
organization provides an
excess benefit to certain persons, an excise tax may be imposed. See Excise tax on excess benefit transactions under Public
Charities in chapter 3 for more information about this tax.
Examples.
Types of organizations that are considered to be social welfare organizations are civic associations and volunteer
fire companies.
Nonprofit operation.
You must submit evidence that your organization is organized and will be operated on a nonprofit basis. However, such
evidence, including the fact
that your organization is organized under a state law relating to nonprofit corporations, will not in itself establish a social
welfare purpose.
Social welfare.
To establish that your organization is organized exclusively to promote social welfare, you should submit evidence
with your application showing
that your organization will operate primarily to further (in some way) the common good and general welfare of the people of
the community (such as by
bringing about civic betterment and social improvements).
An organization that restricts the use of its facilities to employees of selected corporations and their guests is
primarily benefiting a private
group rather than the community. It therefore does not qualify as a section 501(c)(4) organization. Similarly, an organization
formed to represent
member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants
in the community.
However, an organization formed to promote the legal rights of all tenants in a particular community may qualify under section
501(c)(4) as a social
welfare organization.
Political activity.
Promoting social welfare does not include direct or indirect participation or intervention in political campaigns
on behalf of or in opposition to
any candidate for public office. However, if you submit proof that your organization is organized exclusively to promote social
welfare, it may still
obtain exemption even if it participates legally in some political activity on behalf of or in opposition to candidates for
public office. See the
discussion in chapter 2 under
Political Organization Income Tax Return.
Social activity.
If social activities will be the primary purpose of your organization, you should not file an application for exemption
as a social welfare
organization but should file for exemption as a social club described in section 501(c)(7).
Retirement benefit program.
An organization established by its members that has as its primary activity providing supplemental retirement benefits
to its members or death
benefits to their beneficiaries does not qualify as an exempt social welfare organization. It may qualify under another paragraph
of section 501(c)
depending on all the facts.
However, a nonprofit association that is established, maintained, and funded by a local government to provide the
only retirement benefits to a
class of employees may qualify as a social welfare organization under section 501(c)(4).
Tax treatment of donations.
Donations to volunteer fire companies are deductible on the donor's federal income tax return, but only if made for
exclusively public purposes.
Contributions to civic leagues or other section 501(c)(4) organizations generally are not deductible as charitable contributions
for federal income
tax purposes. They may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer's
business. However, see
Deduction not allowed for dues used for political or legislative activities under
501(c)(6) — Business Leagues, Etc. for
more information.
The following information should be contained in the application form and accompanying statements of certain types of civic
leagues or social
welfare organizations.
Volunteer fire companies.
If your organization wishes to obtain exemption as a volunteer fire company or similar organization, you should submit
evidence that its members
are actively engaged in fire fighting and similar disaster assistance, whether it actually owns the fire fighting equipment,
and whether it provides
any assistance for its members, such as death and medical benefits in case of injury to them.
If your organization does not have an independent social purpose, such as providing recreational facilities for members,
it may be exempt under
section 501(c)(3). In this event, your organization should file Form 1023.
Homeowners' associations.
A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks
and to enforce covenants
to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the
community. The term
community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. Whether a
particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case.
Even if an area
represented by an association is not a community, the association can still qualify for exemption if its activities benefit
a community.
The association should submit evidence that areas such as roadways and park land that it owns and maintains are open
to the general public and not
just its own members. It also must show that it does not engage in exterior maintenance of private homes.
A homeowners' association that is not exempt under section 501(c)(4) and that is a condominium management association,
a residential real estate
management association, or a timeshare association generally may elect under the provisions of section 528 to receive certain
tax benefits that, in
effect, permit it to exclude its exempt function income from its gross income.
Other organizations.
Other nonprofit organizations that qualify as social welfare organizations include:
-
An organization operating an airport that is on land owned by a local government, which supervises the airport's operation, and
that serves the general public in an area with no other airport,
-
A community association that works to improve public services, housing and residential parking, publishes a free community
newspaper, sponsors a community sports league, holiday programs and meetings, and contracts with a private security service
to patrol the
community,
-
A community association devoted to preserving the community's traditions, architecture, and appearance by representing it before
the local legislature and administrative agencies in zoning, traffic, and parking matters,
-
An organization that tries to encourage industrial development and relieve unemployment in an area by making loans to businesses
so they will relocate to the area, and
-
An organization that holds an annual festival of regional customs and traditions.
501(c)(5) — Labor, Agricultural, and Horticultural Organizations
If you are a member of an organization that wants to obtain recognition of exemption from federal income tax as a labor, agricultural,
or
horticultural organization, you should submit an application on Form 1024. You must indicate in your application for exemption
and accompanying
statements that your organization will not have any net earnings benefiting any member. In addition, you should follow the
procedure for obtaining
recognition of exempt status described in chapter 1. Submit any additional information that may be required, as described
in this section.
Tax treatment of donations.
Contributions to labor, agricultural, and horticultural organizations are not deductible as charitable contributions
on the donor's federal income
tax return. However, such payments may be deductible as business expenses if they are ordinary and necessary in the conduct
of the taxpayer's trade or
business. For more information about certain limits affecting the deductibility of these business expenses, see
Deduction not allowed for dues
used for political or legislative activities under
501(c)(6) — Business Leagues, Etc.
A labor organization is an association of workers who have combined to protect and promote the interests of the members by
bargaining collectively
with their employers to secure better working conditions.
To show that your organization has the purpose of a labor organization, you should include in the articles of organization
or accompanying
statements (submitted with your exemption application) information establishing that the organization is organized to better
the conditions of
workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations. In
addition, no net earnings
of the organization may benefit any member.
Composition of membership.
While a labor organization generally is composed of employees or representatives of the employees (in the form of
collective bargaining agents) and
similar employee groups, evidence that an organization's membership consists mainly of workers does not in itself indicate
an exempt purpose. You must
show in your application that your organization has the purposes described in the preceding paragraph. These purposes may
be accomplished by a single
labor organization acting alone or by several organizations acting together through a separate organization.
Benefits to members.
The payment by a labor organization of death, sick, accident, and similar benefits to its individual members with
funds contributed by its members,
if made under a plan to better the conditions of the members, does not preclude exemption as a labor organization. However,
an organization does not
qualify for exemption as a labor organization if it has no authority to represent members in job-related matters, even if
it provides weekly income to
its members in the event of a lawful strike by the members' union, in return for an annual payment by the member.
Agricultural and Horticultural Organizations
Agricultural and horticultural organizations are connected with raising livestock, forestry, cultivating land, raising and
harvesting crops or
aquatic resources, cultivating useful or ornamental plants, and similar pursuits.
For the purpose of these provisions, aquatic resources include only animal or vegetable life, but not mineral resources. The term
harvesting, in this case, includes fishing and related pursuits.
Agricultural organizations may be quasi-public in character and are often designed to encourage the development of better
agricultural and
horticultural products through a system of awards, using income from entry fees, gate receipts, and donations to meet the
necessary expenses of upkeep
and operation. When the activities are directed toward the improvement of marketing or other business conditions in one or
more lines of business,
rather than the improvement of production techniques or the betterment of the conditions of persons engaged in agriculture,
the organization must
qualify for exemption as a business league, board of trade, or other organization, as discussed next in the section on 501(c)(6)
organizations.
The primary purpose of exempt agricultural and horticultural organizations must be to better the conditions of those engaged
in agriculture or
horticulture, develop more efficiency in agriculture or horticulture, or improve the products.
The following list contains some examples of activities that show an agricultural or horticultural purpose.
-
Promoting various cooperative agricultural, horticultural, and civic activities among rural residents by a state and county
farm and home
bureau.
-
Exhibiting livestock, farm products, and other characteristic features of agriculture and horticulture.
-
Testing soil for members and nonmembers of the farm bureau on a cost basis, the results of the tests and other recommendations
being
furnished to the community members to educate them in soil treatment.
-
Guarding the purity of a specific breed of livestock.
-
Encouraging improvements in the production of fish on privately-owned fish farms.
-
Negotiating with processors for the price to be paid to members for their crops.
501(c)(6) — Business Leagues, Etc.
If your association wants to apply for recognition of exemption from federal income tax as a nonprofit business league, chamber
of commerce, real
estate board, board of trade, or professional football league (whether or not administering a pension fund for football players),
it should file Form
1024. For a discussion of the procedure to follow, see chapter 1.
Your organization must indicate in its application form and attached statements that no part of its net earnings will benefit
any private
shareholder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried
on for profit (even if the
business is operated on a cooperative basis or produces only sufficient income to be self-sustaining).
In addition, your organization must be primarily engaged in activities or functions that are the basis for its exemption.
It must be primarily
supported by membership dues and other income from activities substantially related to its exempt purpose.
A business league, in general, is an association of persons having some common business interest, the purpose of which is
to promote that common
interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional
associations are
considered business leagues.
Chamber of commerce.
A chamber of commerce usually is composed of the merchants and traders of a city.
Board of trade.
A board of trade often consists of persons engaged in similar lines of business. For example, a nonprofit organization
formed to regulate the sale
of a specified agricultural commodity to assure equal treatment of producers, warehouse workers, and buyers is a board of
trade.
Chambers of commerce and boards of trade usually promote the common economic interests of all the commercial enterprises
in a given trade
community.
Real estate board.
A real estate board consists of members interested in improving the business conditions in the real estate field.
It is not organized for profit
and no part of the net earnings benefits any private shareholder or individual.
General purpose.
You must indicate in the material submitted with your application that your organization will be devoted to the improvement
of business conditions
of one or more lines of business as distinguished from the performance of particular services for individual persons. It must
be shown that the
conditions of a particular trade or the interests of the community will be advanced. Merely indicating the name of the organization
or the object of
the local statute under which it is created is not enough to demonstrate the required general purpose.
Line of business.
This term generally refers either to an entire industry or to all components of an industry within a geographic area.
It does not include a group
composed of businesses that market a particular brand within an industry.
Common business interest.
A common business interest of all members of the organization must be established by the application documents.
Examples.
Activities that would tend to illustrate a common business interest are:
-
Promotion of higher business standards and better business methods and encouragement of uniformity and cooperation by a retail
merchants
association,
-
Education of the public in the use of credit,
-
Establishment of uniform casualty rates and compilation of statistical information by an insurance rating bureau operated
by casualty
insurance companies,
-
Establishment and maintenance of the integrity of a local commercial market,
-
Operation of a trade publication primarily intended to benefit an entire industry, and
-
Encouragement of the use of goods and services of an entire industry (such as a lawyer referral service whose main purpose
is to introduce
individuals to the use of the legal profession in the hope that they will enter into lawyer-client relationships on a paying
basis as a result).
Improvement of business conditions
Generally, this must be shown to be the purpose of the organization. This is not established by evidence of particular
services that provide a
convenience or economy to individual members in their businesses, such as advertising that carries the name of members, interest-free
loans, assigning
exclusive franchise areas, operation of a real estate multiple listing system, or operation of a credit reporting agency.
Stock or commodity exchange.
A stock or commodity exchange is not a business league, chamber of commerce, real estate board, or board of trade
and is not exempt under section
501(c)(6).
Legislative activity.
An organization that is exempt under section 501(c)(6) may work for the enactment of laws to advance the common business
interests of the
organization's members.
Deduction not allowed for dues used for political or legislative activities.
A taxpayer cannot deduct the part of dues or other payments to a business league, trade association, labor union,
or similar organization that is
for any of the following activities.
-
Influencing legislation.
-
Participating or intervening in a political campaign for, or against, any candidate for public office.
-
Trying to influence the general public, or part of the general public, with respect to elections, legislative matters, or
referendums (also
known as grassroots lobbying).
-
Communicating directly with certain executive branch officials to try to influence their official actions or positions.
See
Dues Used for Lobbying or Political Activities under
Required Disclosures in chapter 2 for more information.
Exception for local legislation.
Members may deduct dues (or assessments) to an organization that are for expenses of:
-
Appearing before, submitting statements to, or sending communications to members of a local council or similar governing body
with respect
to legislation or proposed legislation of direct interest to the member, or
-
Communicating information between the member and the organization with respect to local legislation or proposed legislation
of direct
interest to the organization or the member.
Legislation or proposed legislation is of direct interest to a taxpayer if it will, or may reasonably be expected to, affect
the taxpayer's
trade or business.
De minimis exception.
In-house expenditures of $2,000 or less for the year for activities (1) – (4) listed earlier will not prevent a deduction
for dues, if the
dues meet all other tests to be deductible as a business expense.
Grassroots lobbying.
A tax-exempt trade association, labor union, or similar organization is considered to be engaging in grassroots lobbying
if it contacts prospective
members or calls upon its own members to contact their employees and customers for the purpose of urging such persons to communicate
with their
elected state or Congressional representatives to support the promotion, defeat, or repeal of legislation that is of direct
interest to the
organization. Any dues or assessments directly related to such activities are not deductible by the taxpayer, since the individuals
being contacted,
who are not members of the organization, are a segment of the general public.
Tax treatment of donations.
Contributions to organizations described in this section are not deductible as charitable contributions on the donor's
federal income tax return.
They may be deductible as trade or business expenses if ordinary and necessary in the conduct of the taxpayer's business.
501(c)(7) — Social and Recreation Clubs
If your club is organized for pleasure, recreation, and other similar nonprofitable purposes and substantially all of its
activities are for these
purposes, it should file Form 1024 to apply for recognition of exemption from federal income tax.
In applying for recognition of exemption, you should submit the information described in this section. Also see chapter 1
for the procedures to
follow.
Typical organizations that should file for recognition of exemption as social clubs include:
-
College alumni associations that are not described in chapter 3 under Alumni association,
-
College fraternities or sororities operating chapter houses for students,
-
Country clubs,
-
Amateur hunting, fishing, tennis, swimming, and other sport clubs,
-
Dinner clubs that provide a meeting place, library, and dining room for members,
-
Hobby clubs,
-
Garden clubs, and
-
Variety clubs.
Discrimination prohibited.
Your organization will not be recognized as tax exempt if its charter, bylaws, or other governing instrument, or any
written policy statement
provides for discrimination against any person on the basis of race, color, or religion.
However, a club that in good faith limits its membership to the members of a particular religion to further the teachings
or principles of that
religion and not to exclude individuals of a particular race or color will not be considered as discriminating on the basis
of religion. Also, the
restriction on religious discrimination does not apply to a club that is an auxiliary of a fraternal beneficiary society (discussed
later) if that
society is described in section 501(c)(8) and exempt from tax under section 501(a) and limits its membership to the members
of a particular religion.
Private benefit prohibited.
No part of the organization's net earnings may benefit any person having a personal and private interest in the activities
of the organization. For
purposes of this requirement, it is not necessary that net earnings be actually distributed. Even undistributed earnings can
benefit members. Examples
of this include a decrease in membership dues or an increase in the services the club provides to its members without a corresponding
increase in dues
or other fees paid for club support. However, fixed-fee payments to members who bring new members into the club are not an
inurement of the club's net
earnings, if the payments are reasonable compensation for performance of a necessary administrative service.
Purposes.
To show that your organization possesses the characteristics of a club within the meaning of the exemption law, you
should submit evidence with
your application that personal contact, commingling, and fellowship exist among members. You must show that members are bound
together by a common
objective of pleasure, recreation, and other nonprofitable purposes.
Fellowship need not be present between each member and every other member of a club if it is a material part in the
life of the organization. A
statewide or nationwide organization that is made up of individual members, but is divided into local groups, satisfies this
requirement if fellowship
is a material part of the life of each local group.
The term
other nonprofitable purposes means other purposes similar to pleasure and recreation. For example, a club that, in addition to
its social activities, has a plan for the payment of sick and death benefits is not operating exclusively for pleasure, recreation,
and other
nonprofitable purposes.
Limited membership.
The membership in a social club must be limited. To show that your organization has a purpose that would characterize
it as a club, you should
submit evidence with your application that there are limits on admission to membership consistent with the character of the
club.
A social club that issues
corporate membership is dealing with the general public in the form of the corporation's employees. Corporate
members of a club are not the kind of members contemplated by the law. Gross receipts from these members would be a factor
in determining whether the
club qualifies as a social club. See
Gross receipts from nonmembership sources, later. Bona fide individual memberships paid for by a
corporation would not have an effect on the gross receipts source.
The fact that a social club may have an
associate (nonvoting) class of membership will not be, in and of itself, a cause for
nonrecognition of exemption. However, if one membership class pays substantially lower dues and fees than another membership
class, although both
classes enjoy the same rights and privileges in using the club facilities, there may be an inurement of income to the benefited
class, resulting in a
denial of the club's exemption.
Support.
In general, your club should be supported solely by membership fees, dues, and assessments. However, if otherwise
entitled to exemption, your club
will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club
activities.
Business activities.
If your club will engage in business, such as selling real estate, timber, or other products or services, it generally
will be denied exemption.
However, evidence submitted with your application form that your organization will provide meals, refreshments, or services
related to its exempt
purposes only to its own members or their dependents or guests will not cause denial of exemption.
Facilities open to public.
Evidence that your club's facilities will be open to the general public (persons other than members or their dependents
or guests) may cause denial
of exemption. This does not mean, however, that any dealing with outsiders will automatically deprive a club of exemption.
Gross receipts from nonmembership sources.
A section 501(c)(7) organization may receive up to 35% of its gross receipts, including investment income, from sources
outside of its membership
without losing its tax-exempt status. Of the 35%, up to 15% of the gross receipts may be derived from the use of the club's
facilities or services by
the general public or from other activities not furthering social or recreational purposes for members. If an organization
has outside income that is
more than these limits, all the facts and circumstances will be taken into account in determining whether the organization
qualifies for exempt
status.
Gross receipts.
Gross receipts, for this purpose, are receipts from the normal and usual (traditionally conducted) activities of the
club. These receipts include
charges, admissions, membership fees, dues, assessments, investment income, and normal recurring capital gains on investments.
Receipts do not include
initiation fees and capital contributions. Unusual amounts of income, such as from the sale of a clubhouse or similar facility,
are not included in
gross receipts or in figuring the percentage limits.
Fraternity foundations.
If your organization is a foundation formed for the exclusive purpose of acquiring and leasing a chapter house to
a local fraternity chapter or
sorority chapter maintained at an educational institution and does not engage in any social activities, it may be a title
holding corporation
(discussed, later, under section 501(c)(2) organizations and under section 501(c)(25) organizations) rather than a social
club.
Tax treatment of donations.
Donations to exempt social and recreation clubs are not deductible as charitable contributions on the donor's federal
income tax return.
501(c)(8) and 501(c)(10) — Fraternal Beneficiary Societies and Domestic Fraternal Societies
This section describes the information to be provided upon application for recognition of exemption by two types of fraternal
societies:
beneficiary and domestic. The major distinction is that fraternal beneficiary societies provide for the payment of life, sick,
accident, or other
benefits to their members or their dependents, while domestic fraternal societies do not provide these benefits but rather
devote their earnings to
fraternal, religious, charitable, etc., purposes. The procedures to follow in applying for recognition of exemption are described
in chapter 1.
If your organization is controlled by a central organization, you should check with your controlling organization to determine
whether your unit
has been included in a group exemption letter or may be added. If so, your organization need not apply for individual recognition
of exemption. For
more information see Group Exemption Letter in chapter 1 of this publication.
Tax treatment of donations.
Donations by an individual to a domestic fraternal beneficiary society or a domestic fraternal society operating under
the lodge system are
deductible as charitable contributions only if used exclusively for religious, charitable, scientific, literary, or educational
purposes or for the
prevention of cruelty to children or animals.
Fraternal Beneficiary Societies (501(c)(8))
A fraternal beneficiary society, order, or association should file an application for recognition of exemption from federal
income tax on Form
1024. The application and accompanying statements should establish that the organization:
-
Is a fraternal organization,
-
Operates under the lodge system or for the exclusive benefit of the members of a fraternal organization itself operating under
the lodge
system, and
-
Provides for the payment of life, sick, accident, or other benefits to the members of the society, order, or association or
their
dependents.
Lodge system.
Operating under the lodge system means carrying on activities under a form of organization that comprises local branches,
chartered by a parent
organization and largely self-governing, called lodges, chapters, or the like.
Payment of benefits.
It is not essential that every member be covered by the society's program of sick, accident, or death benefits. An
organization can qualify for
exemption if most of its members are eligible for benefits, and the benefits are paid from contributions or dues paid by those
members.
The benefits must be limited to members and their dependents. If members will have the ability to confer benefits
to other than themselves and
their dependents, exemption will not be recognized.
Whole-life insurance.
Whole-life insurance constitutes a life benefit under section 501(c)(8) even though the policy may contain investment
features such as a cash
surrender value or a policy loan.
Reinsurance pool.
Payments by a fraternal beneficiary society into a state-sponsored reinsurance pool that protects participating insurers
against excessive losses
on major medical health and accident insurance will not preclude exemption as a fraternal beneficiary society.
Domestic Fraternal Societies (501(c)(10))
A domestic fraternal society, order, or association may file an application for recognition of exemption from federal income
tax on Form 1024. The
application and accompanying statements should establish that the organization:
-
Is a domestic fraternal organization,
-
Operates under the lodge system,
-
Devotes its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes,
and
-
Does not provide for the payment of life, sick, accident, or other benefits to its members.
The organization may arrange with insurance companies to provide optional insurance to its members without jeopardizing its
exempt status.
501(c)(4), 501(c)(9), and 501(c)(17) — Employees' Associations
This section describes the information to be provided upon application for recognition of exemption by the following types
of employees'
associations:
-
A local association of employees whose membership is limited to employees of a designated person or persons in a particular
municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes,
-
A voluntary employees' beneficiary association (including federal employees' associations) organized to pay life, sick, accident,
and similar benefits to members or their dependents, or designated beneficiaries, if no part of the net earnings of the association
benefits any
private shareholder or individual, and
-
A supplemental unemployment benefit trust whose primary purpose is providing for payment of supplemental unemployment
benefits.
Both the application form to file and the information to provide are discussed later under the section that describes your
employee association.
Chapter 1 describes the procedures to follow in applying for exemption.
Tax treatment of donations.
Donations to these organizations are not deductible as charitable contributions on the donor's federal income tax
return.
Local Employees' Associations (501(c)(4))
A local employees' association may apply for recognition of exemption by filing Form 1024. The organization must submit evidence
that:
-
It is of a purely local character,
-
Its membership is limited to employees of a designated person or persons in a particular locality, and
-
Its net earnings will be devoted exclusively to charitable, educational, or recreational purposes.
A local association of employees that has established a system of paying retirement or death benefits, or both, to its members
will not qualify for
exemption since the payment of these benefits is not considered as being for charitable, educational, or recreational purposes.
Similarly, a local
association of employees that is operated primarily as a cooperative buying service for its members in order to obtain discount
prices on merchandise,
services, and activities does not qualify for exemption.
Voluntary Employees' Beneficiary Associations (501(c)(9))
An application for recognition of exemption as a voluntary employees' beneficiary association must be filed on Form 1024.
The material submitted
with the application must show that your organization:
-
Is a voluntary association of employees,
-
Will provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries
and
substantially all of its operations are for this purpose, and
-
Will not allow any of its earnings to benefit any private individual or shareholder except in the form of scheduled benefit
payments.
Notice requirement.
An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS
that it is applying for
recognition of exempt status. The organization gives notice by filing Form 1024. If the notice is not given by 15 months after
the end of the month in
which the organization was created, the organization will not be exempt for any period before notice is given. The EO area
manager may grant an
extension of time for filing the notice under the same procedures as those described for section 501(c)(3) organizations in
chapter 3 under
Application for Recognition of Exemption.
Membership.
Membership of a section 501(c)(9) organization must consist of individuals who are employees and have an employment-related
common bond. This
common bond may be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements,
membership in a labor
union, or membership in one or more locals of a national or international labor union.
The membership of an association may include some individuals who are not employees, provided they have an employment-related
bond with the
employee-members. For example, the owner of a business whose employees are members of the association may be a member. An
association will be
considered composed of employees if 90% of its total membership on one day of each quarter of its tax year consists of employees.
Employees.
Employees include individuals who became entitled to membership because they are or were employees. For example, an
individual will qualify as an
employee even though the individual is on a leave of absence or has been terminated due to retirement, disability, or layoff.
Generally, membership is
voluntary if an affirmative act is required on the part of an employee to become a member. Conversely,
membership is involuntary if the designation as a member is due to employee status. However, an association will be considered
voluntary if employees
are required to be members of the organization as a condition of their employment and they do not incur a detriment (such
as a payroll deduction) as a
result of their membership. An employer has not imposed involuntary membership on the employee if membership is required as
the result of a collective
bargaining agreement or as an incident of membership in a labor organization.
Payment of benefits.
The information submitted with your application must show that your organization will pay life, sick, accident, supplemental
unemployment, or other
similar benefits. The benefits may be provided directly by your association or indirectly by your association through the
payments of premiums to an
insurance company (or fees to a medical clinic). Benefits may be in the form of medical, clinical, or hospital services, transportation
furnished for
medical care, or money payments.
Nondiscrimination requirements.
An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements.
However, if the
organization is part of a plan that is a collective bargaining agreement that was the subject of good faith bargaining between
employee organizations
and employers, the plan need not meet these requirements for the organization to qualify as tax exempt.
A plan meets the nondiscrimination requirements only if both of the following statements are true.
-
Each class of benefits under the plan is provided under a classification of employees that is set forth in the plan and does
not
discriminate in favor of employees who are highly compensated individuals.
-
The benefits provided under each class of benefits do not discriminate in favor of highly compensated individuals.
A life insurance, disability, severance pay, or supplemental unemployment compensation benefit does not discriminate in favor
of highly
compensated individuals merely because the benefits available bear a uniform relationship to the total compensation, or the
basic or regular rate of
compensation, of employees covered by the plan.
For purposes of determining whether a plan meets the nondiscrimination requirements, the employer may elect to exclude
all disability or severance
payments payable to individuals who are in pay status as of January 1, 1985. This will not apply to any increase in such payment
by any plan amendment
adopted after June 22, 1984.
If a plan provides a benefit for which there is a nondiscrimination provision provided under Chapter 1 of the Internal
Revenue Code as a condition
of that benefit being excluded from gross income, these nondiscrimination requirements do not apply. The benefit will be considered
nondiscriminatory
only if it meets the nondiscrimination provision of the applicable Code section. For example, benefits provided under a medical
reimbursement plan
would meet the nondiscrimination requirements for an association, if the benefits meet the nondiscrimination requirements
of Code section 105(h)(3)
and 105(h)(4).
Excluded employees.
Certain employees who are not covered by a plan may be excluded from consideration in applying these requirements.
These include employees:
-
Who have not completed 3 years of service,
-
Who have not attained age 21,
-
Who are seasonal or less than half-time employees,
-
Who are not in the plan and who are included in a unit of employees covered by a collective bargaining agreement if the class
of benefits
involved was the subject of good faith bargaining, or
-
Who are nonresident aliens and who receive no earned income from the employer that has United States source income.
Highly compensated individual.
A highly compensated individual is one who:
-
Owned 5 percent or more of the employer at any time during the current year or the preceding year,
-
Received more than $90,000 for 2002 (adjusted for inflation) in compensation from the employer for the preceding year, and
-
Was among the top 20% of employees by compensation for the preceding year.
But the employer can choose not to have (3) apply.
Aggregation rules.
The employer may choose to treat two or more plans as one plan for purposes of meeting the nondiscrimination requirements.
Employees of controlled
groups of corporations, trades or businesses under common control, or members of an affiliated service group, are treated
as employees of a single
employer. Leased employees are treated as employees of the recipient.
One employee.
A trust created to provide benefits to one employee will not qualify as a
voluntary employees' beneficiary association under section
501(c)(9).
Supplemental Unemployment Benefit Trusts (501(c)(17))
A trust or trusts forming part of a written plan (established and maintained by an employer, his or her employees, or both)
providing solely for
the payment of supplemental unemployment compensation benefits must file the application for recognition of exemption on Form
1024. The trust must be
a valid, existing trust under local law and must be evidenced by an executed document. A conformed copy of the plan of which
the trust is a part
should be attached to the application.
Notice requirement.
An organization will not be considered tax exempt under this section unless the organization gives notice to the IRS
that it is applying for
recognition of exempt status. The organization gives notice by filing Form 1024. If the notice is not given by 15 months after
the end of the month in
which the organization was created, the organization will not be exempt for any period before such notice is given. The EO
area manager may grant an
extension of time for filing the notice under the same procedures as those described for section 501(c)(3) organizations in
chapter 3 under
Application for Recognition of Exemption.
Types of payments.
You must show that the supplemental unemployment compensation benefits will be benefits paid to an employee because
of the employee's involuntary
separation from employment (whether or not the separation is temporary) resulting directly from a reduction-in-force, discontinuance
of a plant or
operation, or other similar conditions. In addition, sickness and accident benefits (but not vacation, retirement, or death
benefits) may be included
in the plan if these are subordinate to the unemployment compensation benefits.
Diversion of funds.
It must be impossible under the plan (at any time before the satisfaction of all liabilities with respect to employees
under the plan) to use or to
divert any of the corpus or income of the trust to any purpose other than the payment of supplemental unemployment compensation
benefits (or sickness
or accident benefits to the extent just explained).
Discrimination in benefits.
Neither the terms of the plan nor the actual payment of benefits may be discriminatory in favor of the company's officers,
stockholders,
supervisors, or highly paid employees. However, a plan is not discriminatory merely because benefits bear a uniform relationship
to compensation or
the rate of compensation.
Reestablishing exemption.
If your organization is a supplemental unemployment benefit trust and has received a denial of exemption because it
engaged in a prohibited
transaction, as defined by section 503(b), it may file a claim for exemption in any tax year following the tax year in which
the notice of denial was
issued. It must file the claim on Form 1024. The organization must include a written declaration that it will not knowingly
again engage in a
prohibited transaction. An authorized principal officer of your organization must make this declaration under the penalties
of perjury.
If your organization has satisfied all requirements as a supplemental unemployment benefit trust described in section
501(c)(17), it will be
notified in writing that it has been recognized as exempt. However, the organization will be exempt only for those tax years
after the tax year in
which the claim for exemption (Form 1024) is filed. Tax year in this case means the established annual accounting period of
the organization or, if
the organization has not established an annual accounting period, the calendar year. For more information about the requirements
for reestablishing an
exemption previously denied, contact the IRS.
501(c)(12) — Local Benevolent Life Insurance Associations, Mutual Irrigation and Telephone Companies, and Like Organizations
Each of the following organizations may apply for recognition of exemption from federal income tax by filing Form 1024.
-
Benevolent life insurance associations of a purely local character and like organizations.
-
Mutual ditch or irrigation companies and like organizations.
-
Mutual or cooperative telephone companies and like organizations.
A like organization is an organization that performs a service comparable to that performed by any one of the above organizations.
The information to be provided upon application by each of these organizations is described in this section. For information
as to the procedures
to follow in applying for exemption, see chapter 1.
General requirements.
These organizations must use their income solely to cover losses and expenses, with any excess being returned to members
or retained for future
losses and expenses. They must collect at least 85% of their income from members for the sole purpose of meeting losses and
expenses.
Mutual character.
These organizations, other than benevolent life insurance associations, must be organized and operated on a mutual
or cooperative basis. They are
associations of persons and organizations, or both, banded together to provide themselves a mutually desirable service approximately
at cost and on a
mutual basis. To maintain the mutual characteristic of democratic ownership and control, they must be so organized and operated
that their members
have the right to choose the management, to receive services substantially at cost, to receive a return of any excess of payments
over losses and
expenses, and to share in any assets upon dissolution.
The rights and interests of members in the annual savings of the organization must be determined in proportion to
their business with the
organization. Upon dissolution, gains from the sale of appreciated assets must be distributed to all persons who were members
during the period the
assets were owned by the organization in proportion to the amount of business done during that period. The bylaws must not
provide for forfeiture of a
member's rights and interest upon withdrawal or termination.
Membership.
Membership of a mutual organization consists of those who join the organization to obtain its services, acquire an
interest in its assets, and have
a voice in its management. In a stock company, the stockholders are members. Membership may include distributors who furnish
service to individual
consumers. However, it does not include the individual consumers served by the distributor. A mutual service organization
may serve nonmembers as long
as at least 85% of its gross income is collected from members. However, a mutual life insurance organization may have no policyholders
other than its
members.
Losses and expenses.
In furnishing services substantially at cost, an organization must use its income solely for paying losses and expenses.
Any excess income not
retained in reasonable reserves for future losses and expenses belongs to members in proportion to their patronage or business
done with the
organization. If such patronage refunds are retained in reasonable amounts for purposes of expanding facilities, retiring
capital indebtedness,
acquiring other assets, etc., the organization must maintain records sufficient to reflect the equity of each member in the
assets acquired with the
funds.
Dividends.
Dividends paid to stockholders on stock or the value of a capital equity interest
constitute a distribution of profits and are not an expense
within the term losses and expenses. Therefore, a mutual or cooperative association whose shares carry the right to dividends
will not qualify
for exemption. However, this prohibition does not apply to the distribution of the unexpended balance of collections or assessments
remaining on hand
at the end of the year to members as patronage dividends or refunds prorated to each on the basis of their patronage or business
done with the
organization. Such distribution represents a reduction in the cost of services rendered to the member.
The 85% requirement.
All of the organizations discussed in this section must submit evidence with their application that they receive 85%
or more of their gross income
from their members for the sole purpose of meeting losses and expenses. Nevertheless, certain items of income are excluded
from the computation of the
85% requirement if the organization is a mutual or cooperative telephone or electric company.
A mutual or cooperative telephone company will exclude from the computation of the 85% requirement any income received
or accrued from:
-
A nonmember telephone company for the performance of communication services involving the completion of long distance calls
to, from, or
between members of the mutual or cooperative telephone company,
-
Qualified pole rentals,
-
The sale of display listings in a directory furnished to its members, or
-
The prepayment of a loan created in 1987, 1988, or 1989, under section 306A, 306B, or 311 of the Rural Electrification Act
of
1936.
A mutual or cooperative electric company will exclude from the computation any income received or accrued from qualified
pole rentals and from the
prepayment of loans described in (4) above. An electric cooperative's sale of excess fuel at cost in the year of purchase
is not income for purposes
of determining compliance with the 85% requirement.
The term
qualified pole rental means any rental of a pole (or other structure used to support wires) if the pole (or other structure) is
used:
-
By the telephone or electric company to support one or more wires that are used by the company in providing telephone or electric
services
to its members, and
-
Pursuant to the rental to support one or more wires (in addition to wires described in (1)) for use in connection with the
transmission by
wire of electricity or of telephone or other communications.
The term rental, for this purpose, includes any sale of the right to use the pole (or other structure).
The 85% requirement is applied on the basis of
an annual accounting period. Failure of an organization to meet the requirement in a
particular year precludes exemption for that year, but has no effect upon exemption for years in which the 85% requirement
is met.
Gain from the
sale or conversion of the organization's property is not considered an amount received from members in determining whether
the organization's income consists of amounts collected from members.
Because the 85% income test is based on gross income, capital losses cannot be used to reduce capital gains for purposes
of this test.
Example.
The books of an organization reflect the following for the calendar year.
Since amounts collected from members do not constitute at least 85% of gross income, the organization is not entitled
to exemption from federal
income tax for the year.
Voluntary contributions in the nature of gifts are not taken into account for purposes of the 85% computation.
Other tax-exempt income besides gifts is considered as income received from other than members in applying the 85% test.
If the 85% test is not met, your organization, if classifiable under this section, will not qualify for exemption as any other
type of organization
described in this publication.
Tax treatment of donations.
Donations to an organization described in this section are not deductible as charitable contributions on the donor's
federal income tax return.
Local Life Insurance Associations
A benevolent life insurance association or an organization seeking recognition of exemption on grounds of similarity to a
benevolent life insurance
association must submit evidence upon applying for recognition of exemption that it will be of a purely local character, that
its excess funds will be
refunded to members or retained in reasonable reserves to meet future losses and expenses, and that it meets the 85% income
requirement. If an
organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance
and maintains
investments from which more than 15% of its income is derived, it will not be entitled to exemption.
To establish that your organization is of a purely local character, it should show that its activities will be confined to a particular
community, place, or district irrespective of political subdivisions. If the activities of an organization are limited only
by the borders of a state,
it cannot be purely local in character. A benevolent life insurance association that does not terminate membership when a
member moves from the local
area in which the association operates will qualify for exemption if it meets the other requirements.
A copy of each type of policy issued by your organization should be included with the application for recognition of exemption.
Organizations similar to local benevolent life insurance companies.
These organizations include those that in addit
